Wednesday, November 23, 2011

Et Tu, German Bunds? Bad Bond Auction in Germany Raises Eyebrows

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It is obviously another messy day out there - I think we can clearly say that the 'triangle' formation I mentioned Monday has resolved itself to the downside.  Combined with the fact we have broken every major moving average, it remains an environment to protect capital and not be a hero.  Yes there will be the oversold bounce at some point - and likely ferocious, but almost everyone who enjoys that bounce will be harboring big losses.

Anyhow onto other items.  I don't want to raise too much fuss over this, as there have been poor German bond auctions in the past, and it led to nothing but since this happened in a very stressful period for sovereign debt in the Euro zone today's poor auction is getting a lot of attention.  It could be a one off, so we have to see if there is any trend developing in the coming weeks - either way, the fact the Bundesbank had to come in and sop up roughly 40% of the supply of bonds has raised some eyebrows internationally.

I keep receiving emails or comments asking what it would take to bring in the ECB with guns blazing and completely change their mandate - my answer has typically been 'a serious blowout in French yields or Italy hitting some level we have not imagined i.e. 9%+ on their 10 year'.... but I did not even consider that the market would start to shy away from Germany.  It does make sense from the fact that any sort of non central bank rescue is essentially going to be underwritten by Germany - the same reason France is pushing German to change their stance on the issue.  France does not want it's AAA status to be undermined by underwriting their neighbors- so what better way to 'fix' things than printing?

Again, let's not overreact but it is something to take note of!

  • A "disastrous" sale of German benchmark bonds sparked fears on Wednesday the debt crisis was beginning to threaten even Berlin, with the Bundesbank forced to dig deep into its pockets to ensure the auction did not fail.
  • In one of the least successful debt sales by Europe's powerhouse economy since the launch of the single currency, the low returns offered -- just 2 percent annually over 10 years -- deterred investors made uneasy by the escalating cost of the crisis to Germany.
  • That meant the central bank had to pick up 39 percent of the 6 billion euros ($8 billion) of debt Germany had hoped to sell after commercial banks bought just 3.644 billion euros of the issue.  "It is a complete and utter disaster," said Marc Ostwald, strategist at Monument Securities in London.  "This does not bode well, it is the worst of uncovered auctions that we've had this year and little wonder that the Bund sold off on the back of it."
  • The results compared with an average retention rate by the Bundesbank of 17.83 percent at 10-year bond auctions in 2011. Data from IFR, a Thomson Reuters service, showed this to be the highest Bundesbank retention since at least July 1999.
  • The country's debt agency said the shortfall in the sale reflected worsening market nerves, that it would sell back the retained amount to investors on secondary debt markets and that Germany would not face a funding bottleneck.
  • Bund futures, the euro and European stocks fell after the auction, with Germany's 10-year debt costs rising above equivalent U.S. yields for the first time since early October.
  • German yields have been forced down to record lows by demand from investors seeking shelter from the debt crisis that has ensnared Italy and Spain and now threatens to drag down other, higher-rated countries such as France and Belgium.
  • The new bond promised to pay out a 2.0 percent interest rate -- the lowest ever on an issue of German 10-year Bunds. The average yield at the auction was 1.98 percent, down from 2.09 percent at the last sale of the previous benchmark in October.
  • The weak auction demonstrates that some are now beginning to think twice about whether such low yields are appealing given the threat that Germany has to begin diluting its credibility by underwriting the debt of the euro zone's struggling states.
  • "Bunds are starting to lose their appeal because markets have to believe the euro bonds story and Germany is very close to starting, essentially, to guarantee the debt of other countries," said Achilleas Georgolopoulos, strategist at Lloyds Bank in London.
  • A possible path toward a common euro zone bond -- which Germany opposes at it would raise the country's cost of borrowing -- is being laid out by the European Commission, which is unveiling proposals for tighter budget controls over euro zone countries' budgets later on Friday.

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