Failed Bund Auction Having Spillover Effects On Europe

Eariler today there was an auction of €3 billion 30 Year Bunds that failed to attract enough demand to cover the offer: only €2.752 billion in bids were collected, with just €2.458 was sold. This is the first failed bond auction in Germany in over a year. This puts into question the entire premise of entities like PIMCO who believe that German bonds are the go-to flight to safety. Of course, this could be a temporary blip in light of the uncertainty of how Germany will handle Greece now that German opposition has said it would not bail out the troubled PIIG - in many ways this in itself is a game changer for the EMU, or just an artifact of the maturity of the 30 Year: presumably the "flight to safety" sweetspot is focused in the 3-7 year range. On the other hand, peripheral weakness should have generated incremental demand for Bunds if conventional wisdom is correct. What is certain is that auction weakness was instrumental in facilitating weakness at countries like Portugal, and Greece. Although the latter certainly does not need the help.

From the WSJ:

Germany's €3 billion ($4.03 billion) offer of its 30-year bund was undersubscribed at an auction Wednesday, something analysts traced to a possible combination of pricing terms, European debt jitters and heavy market supply.

The German government sold €2.458 billion of the 4.75% July 2040-dated bund at an average yield of 3.83%. Its €3 billion offer, however, attracted only €2.752 billion in bids.

The German debt agency played down the failure to get a full allotment, the first for any German government bond for more than a year. "Underbidding happens once in a while—we don't have a problem with it," Joerg Mueller, a spokesman at the agency, said. Mr. Mueller dismissed some speculation in the markets that higher inflation expectations may have generated disappointment in the yield on offer.

Some analysts also suggested Germany's future participation in any Greek bailout poses a risk to German borrowing requirements. "The aid mechanism for Greece is a potential risk for German paper as Germany will be regarded as one of the main countries [involved in the bailout]," said Ioannis Sokos, strategist at BNP Paribas in London.    "However, we are still not there, as there is a lot of uncertainty with respect to the implementation of the plan," he added.

"Today's results clearly illustrate that 30-year bonds are too long to benefit from flight-to-safety flows," said Jan von Gerich, senior analyst at Nordea Ban in Helsinki. "One should not read today's auction as meaning that the demand for German bonds would be waning more generally," he said.

A more sinister explanation could be that traditional primary market participants, such as Goldman, are punishing the country for its escalation in the Goldman Sachs affair. Nothing like a little bond scare to get things back to normal for GS.