What the German bond auction disaster means

This morning the German government held an auction for 10-year money at just under 2 percent. The auction failed disastrously with a bid-to-cover ratio of just 1.1. The Germans wanted to issue 6 billion euros of 10-year bunds but managed to sell only 3.64 billion, with the central bank picking up 39 percent of the issue.

Many media outlets are reporting the disastrous bond auction results in Germany as an ominous sign. I am of two minds on this. Yes, this was a terrible auction but it is just one auction. So let’s not blow it out of proportion. There is still some time left.

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On the other hand, the economic data this morning made clear that Europe is in a recession and that Germany and France are being dragged in tow. The euro zone PMI Composite came in at 47.2 (higher than expected) but below the 50 boom/bust divide. Germany’s Manufacturing PMI too was lower than 50 at 47.9. And it was lower than expected. I told you 1 1/2 years ago that Spain’s debt woes and Germany’s intransigence lead to double dip and now we are seeing this. Even India and China are slowing, with Chinese manufacturing data at 32-month lows. So we have a synchronised global slowdown.

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Finally, I have to beat this into everyone’s heads because I have said it over and over again. It’s the currency sovereignty, folks! No lender of last resort means:

This is a rolling crisis wave through the eurozone infecting more countries, closer and closer to the core.  As Marshall wrote recently, this is a structural problem. All of the euro zone countries face liquidity constraints and all of them will eventually succumb to the rolling wave of yield spikes one by one until we get a systemic solution: full monetisation and union or break up.

Germany is no different than the rest.

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11 Comments
  1. Roger Glyndwr Lewis says

    Edward when you refer to needed systemic changes(  full monetisation and union or break up) how far would you go? Do you have a position on MMT?
    would you bring the money issuing Power back in house so to speak for the benefit of society as a whole or do you think that a World Super central Bank and Currency is desirable.

  2. Roger Glyndwr Lewis says

    Edward when you refer to needed systemic changes(  full monetisation and union or break up) how far would you go? Do you have a position on MMT?
    would you bring the money issuing Power back in house so to speak for the benefit of society as a whole or do you think that a World Super central Bank and Currency is desirable.

  3. Ebipere Clark says

    Bailing out Greece is not politically acceptable to The Germans; being a ward of the German Finance Ministry or the Troika is not acceptable to The Greeks.

    This is going to end badly.

  4. Ebipere Clark says

    Bailing out Greece is not politically acceptable to The Germans; being a ward of the German Finance Ministry or the Troika is not acceptable to The Greeks.

    This is going to end badly.

  5. Anonymous says

    As you say this is one auction. Though it might concentrate the Germans minds to actually come up with a credible response before the German banks start showing strains and the german public start panicking.  

  6. Anonymous says

    As you say this is one auction. Though it might concentrate the Germans minds to actually come up with a credible response before the German banks start showing strains and the german public start panicking.  

  7. Yohay Elam says

    I certainly see it as disastrous and I think it paves the way for a German nod to massive ECB bond buying. The vigilantes are at their gates. 
    It also means a weaker euro, which has been remarkably resilient so far.  

    1. Sid_finster says

      I think that the likelihood of ECB monetization (or Eurobonds) is what *caused* the auction failure.

      Still, this may have the ffect of a positive feedback loop.

  8. Yohay Elam says

    I certainly see it as disastrous and I think it paves the way for a German nod to massive ECB bond buying. The vigilantes are at their gates. 
    It also means a weaker euro, which has been remarkably resilient so far.  

    1. Sid_finster says

      I think that the likelihood of ECB monetization (or Eurobonds) is what *caused* the auction failure.

      Still, this may have the ffect of a positive feedback loop.

  9. Tyler Eepper says

    just one auction; dont forget, we were told that it was just a Greek problem. Just about every crisis i can remember, some says its just a one off. I hope you are right.

    1. Anonymous says

      I never thought it was just a Greek problem. I always thought that the German banks were a serious under reported problem. That said one bad auction is not a disaster. If there was another bad auction then people should start getting concerned. 

  10. Tyler Eepper says

    just one auction; dont forget, we were told that it was just a Greek problem. Just about every crisis i can remember, some says its just a one off. I hope you are right.

    1. Anonymous says

      I never thought it was just a Greek problem. I always thought that the German banks were a serious under reported problem. That said one bad auction is not a disaster. If there was another bad auction then people should start getting concerned. 

  11. Anonymous says

    ft alphaville seems to be making (or maybe just quoting someone else making) an argument that the BuBa just really wanted some additional collateral, and they bought 40% of this auction so they could have some more collateral to manage interest rates (since pretty much all non-German collateral is not really being accepted as collateral).  Any credibility to this or can we just go with the obvious interpretation that it is just a really bad auction?

    1. Edward Harrison says

      You always have to be sceptical that they are putting on a brave face. But it would make sense that they need more Bunds to sterilize periphery purchases with.

    2. Sid_finster says

      Nice try, BuBa, but an auction takes place at the marginal price. So if the auction didn’t really fail, why weren’t there other bidders willing to outbid the Bundesbank?

      1. Anonymous says

        well that raises another interesting point.  The auction “failed” with the Treasury selling E 3.6 billion of Bunds at 2% ytm, which is a perfectly good rate to pay for 10 year money.  Maybe that’s why there weren’t a lot of other bidders.

  12. Anonymous says

    ft alphaville seems to be making (or maybe just quoting someone else making) an argument that the BuBa just really wanted some additional collateral, and they bought 40% of this auction so they could have some more collateral to manage interest rates (since pretty much all non-German collateral is not really being accepted as collateral).  Any credibility to this or can we just go with the obvious interpretation that it is just a really bad auction?

    1. Edward Harrison says

      You always have to be sceptical that they are putting on a brave face. But it would make sense that they need more Bunds to sterilize periphery purchases with.

    2. Sid_finster says

      Nice try, BuBa, but an auction takes place at the marginal price. So if the auction didn’t really fail, why weren’t there other bidders willing to outbid the Bundesbank?

      1. Anonymous says

        well that raises another interesting point.  The auction “failed” with the Treasury selling E 3.6 billion of Bunds at 2% ytm, which is a perfectly good rate to pay for 10 year money.  Maybe that’s why there weren’t a lot of other bidders.

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