Germany fails to find buyers for 35% of new 10-yea r bond issue (albeit offered at <2%)

[ASH]

From Bloomberg:

German government bonds dropped after the nation missed its maximum sales target at a bund auction by 35 percent, sending the euro lower and 10-year yields higher than comparable U.S. Treasuries.

“This auction is nothing short of a disaster for Germany,” Mark Grant, a managing director at Southwest Securities Inc. in Fort Lauderdale, Florida, said by e-mail. “If the strongest nation in Europe has this kind of difficulty raising capital one shudders concerning the upcoming auctions in other European nations.”

The yield on the 30-year German bond climbed to a two-week high. Total bids at the auction of securities due in January 2022 amounted to 3.889 billion euros ($5.21 billion), out of a maximum target for the sale of 6 billion euros, according to Bundesbank data. The securities were sold at a yield of 1.98 percent. French and Belgian bonds fell for a third day after De Standaard newspaper said Belgium is seeking to renegotiate the break-up plan for lender Dexia SA.

I wonder how big a deal this actually is. On the one hand, the bonds were offered at a yield below 2%, which is insanely low... it's not like Germany is having trouble raising money at decent rates. On the other hand, failing to place 35% of an issue is surprising. It brings to mind some recent speculation in the Buttonwood column at The Economist about how to tell that a crisis solution is nigh:

But Mr McGuire has also figured out what the next stage of the crisis will mean for investors. Up until now, the obvious strategy has been to buy German government bonds and sell just about everything else, on the grounds that, if the euro zone does break up, you want your money to be in Deutsche Marks. But if European politicians do unveil a rescue plan, that will either mean the core countries assuming the burden of eurozone debt, or it will mean that long-term inflation risks will have risen.

At that stage, investors will pile out of long-term German government debt and into the short-term debt of countries like Italy (since the credit risk will have disappeared). Given that plans always leak, that's a signal to watch for; a sudden rise in German bond yields. Mr McGuire thinks the crunch will come in the first or second quarter of 2012.

So, I'm not sure that this is that. Maybe Richard McGuire is onto something, and this signals rumors of a credible resolution to the crisis. But maybe it's a symptom of reduced appetite for any European debt -- a harbinger of a new (final?) stage of the crisis in which all European debt is regarded as subject to too much political risk. I guess we'll find out fairly soon.

[Techdread]

Re: Germany fails to find buyers for 35% of new 10-yea r bond issue (albeit offered at <2%)

Do you mean the reason some buyer's did not turn up is because of the Euro Bond rumours?

Because would not that mean Germany would have to assume the management of the PIIGS ecomomies?

[bill]

Re: Germany fails to find buyers for 35% of new 10-yea r bond issue (albeit offered at <2%)

Hot money from high risk EU nations running to Germany is slowing. Even if there is an EU solution high risk members will remain in debt with some sort of pay down plan.
Germany knows what Investors want as collateral “REAL ASSETS” how about gold. Let’s wait and see how high yields go until “REAL ASSETS” are brought to the table.
Attached to this article is a video clip of Richard Fisher from the FED. (could not get it to post)



http://money.cnn.com/2011/11/23/markets/gold_eurozone/

11-23-2011
NEW YORK (CNNMoney) -- With no end to the eurozone debt crisis in sight, there has also been no end to the stream of possible solutions. The latest involves using gold as collateral.
With eurozone central banks holding some 64% of the world's gold reserves, they'd have the heft to back that up.
And there is some precedent, though that was largely during the pre-euro era. So it is unclear what legal hurdles might need to be overcome to satisfy all 17 euro-area nations.
But assuming those challenges could be addressed, experts see it as a real win-win possibility.
"Historically it's not unusual for a country to use gold as collateral," said Jeffrey Nichols, managing director of American Precious Metals Advisors in New York.
The idea of using gold as collateral was rumored to be part of a broader proposal unveiled by the European Commission Wednesday. Although that plan did not specifically discuss the notion of gold as collateral, experts said it's still a plausible scenario.
The EC's plan did detail three different options for eurobonds, an idea that's been floated around before and one that's been met with staunch resistance from stronger eurozone countries, such as Germany.
"I think it was wrong of Germany to dismiss it out of hand," said Robin Bhar, senior metals analyst at Credit Agricole in London. "If we're moving toward the end game, then everything should be ruled in and nothing should be ruled out."
Eurozone central banks hold roughly 10,792 metric tonnes of gold. At today's prices, that would give the stash a price tag of nearly $650 billion.
While that's not enough to solve all of Europe's problems, it could offer a step in the right direction, especially if it piques the interest of, say China -- a country that has been lukewarm at best about how involved it wants (or doesn't want) to be.
Nichols said that "given China's thirst for gold," it could very well become interested in offering some type of financial assistance to eurozone countries in distress.
And if the eurozone countries don't want to go 'all in,' it's conceivable that at least one country could try the collateralization route -- barring the potential legal hurdles.
"It's quite possible that one of the central banks could use gold as collateral for refinancing," he added.
Italy's central bank has the fourth-largest gold reserve holding, at 2,451 metric tonnes. And it's also the country that's attracting the most attention recently, for its burgeoning debt load of €1.9 trillion, a GDP-to-debt ratio of 120% and steep borrowing costs that are keeping its 10-year yield stuck uncomfortably close to 7%.
What would all this mean for the price of gold? Assuming the plan gets enough support, both Bhar and Nichols see it as a positive.
"It would give a sense that gold held by Euro debtor nations would be less likely to flood the market and give legitimacy to gold having some monetary value," said Nichols.
Just a few months ago, gold prices came within spitting distance of $2,000 an ounce. Currently, prices are hovering around $1,700 an ounce.

[Slimprofits]

Re: Germany fails to find buyers for 35% of new 10-yea r bond issue (albeit offered at <2%)

Thanks Bill and Ash.

[Raz]

Re: Germany fails to find buyers for 35% of new 10-yea r bond issue (albeit offered at <2%)

Thanks Bill and Ash.

Yes, guys, thanks for the heads-up.

But not to worry; I'm sure if it gets bad enough Bernanke will buy their bonds as well.

[ASH]

Re: Germany fails to find buyers for 35% of new 10-yea r bond issue (albeit offered at <2%)

On the other hand, failing to place 35% of an issue is surprising.

Following up, according to the Telegraph, for the other 10-year German bond issues during 2011, the average rate of retention was 17.8% ("retention" meaning that bonds not sold at the primary auction are purchased by the Bundesbank, acting as an agent for the German Debt Agency -- "Finanzagentur" -- and subsequently sold in the secondary market over time). Also, the yield offered was the lowest ever. So although 35% is an unusually high rate of retention, it isn't as though 100% of a bond issue is normally snapped up.

Also, other news sources are putting the retention rate at 39% rather than 35%...

[ASH]

Re: Germany fails to find buyers for 35% of new 10-yea r bond issue (albeit offered at <2%)

Do you mean the reason some buyer's did not turn up is because of the Euro Bond rumours?

Because would not that mean Germany would have to assume the management of the PIIGS ecomomies?

I wasn't thinking in such specific terms. I'm not sure I really buy McGuire's argument, anyway. It's just that I had recently read the piece in The Economist, and I thought I'd pass along the theory. Actually, in my (ill-informed) opinion, this probably doesn't have much to do with rumors of a crisis resolution. It's probably as simple as (1) Germany offering the lowest yield in history on the bond issue, and (2) the persistent lack of agreement about a comprehensive solution finally changing investor posture toward the Euroland as a whole, and not just individual countries with weak finances.

[don]

Re: Germany fails to find buyers for 35% of new 10-yea r bond issue (albeit offered at <2%)

German Bond Auction Failure

[jk]

Re: Germany fails to find buyers for 35% of new 10-yea r bond issue (albeit offered at <2%)

i don't think the drop in the euro today is consistent with the idea that anyone thinks there's some kind of resolution on the horizon.

[ASH]

Re: Germany fails to find buyers for 35% of new 10-yea r bond issue (albeit offered at <2%)

i don't think the drop in the euro today is consistent with the idea that anyone thinks there's some kind of resolution on the horizon.

Neither does Buttonwood. After I made my initial post, the blogger in question mentioned that the pattern in the bond yields don't match what McGuire was talking about, since the yield on peripheral debt didn't drop.

* It doesn't look like this failure represents the scenario outlined in yesterday's post, whereby the prospect of a budget deal caused investors to flee Germany for peripheral debt. Yields on other European debt are also rising, including those of Belgium, which is now paying more than 5%.