Government Bond Auctions: Survival of the Fittest?

During this year, which happens to be the 200th anniversary of the birth of Charles Darwin, it is just possible that some version of the “survival of the fittest” dynamic might begin to appear in the sale of bonds by different governments across the globe.

During the course of last week there was a noticeable lack of interest in the German Bund auction with the Bundesbank retaining 32% of the issue. The US government was able to sell a huge new issue of three year bonds with a bid to cover ratio of 2.2:1, which admittedly was somewhat weaker than the average bid to cover ratio, as reported by Bloomberg, but nevertheless it turned out a lot more successfully than the fears that are beginning to surface in the eurozone market. These fears were well captured in the following news report also from Bloomberg.

Jan. 7 (Bloomberg) -- Germany’s sale of 10-year bunds lured the least demand in six months as investors shied away from a flood of government securities, raising the prospect of increased borrowing costs for Europe’s biggest economy.

Investors bid for 5.2 billion euros ($7.1 billion) of the bonds offered today, a level of demand that prompted the Bundesbank to retain 32 percent of the securities, according to the central bank’s Web site. European governments want to raise money to finance more than $96 billion in bank bailouts and stave off the worst of the global recession. France may sell 7 billion euros of bonds tomorrow and Ireland began marketing five-year debt today. Spain is also planning a sale.

“I would call this a failed auction,” said David Keeble, head of fixed-income strategy in London at Calyon, the investment-banking unit of France’s Credit Agricole SA. “This was a very poor start of auction season.”

The UK government in coming months will almost certainly face similar difficulties to those seen in Germany this week as it tries to finance its massive deficits and has to rely on evaluations of a currency which is arguably even less robust than the euro.

If things get really ugly, something like "too big to fail" could begin to emerge in the way that sovereign debt is evaluated. Of course, the ultimate beneficiary in that kind of struggle will be the US Treasury. With foreign governments holding trillions of dollars worth of US government debt - both explicitly underwritten and agency debt that has an implicit guarantee – these governments can be relied upon to show up at US government auctions, even if they do have a remarkable similarity to other Ponzi schemes.

The obvious difference to other Ponzi schemes is that the existing clients of the US Treasury market have vital self-preservation interests at stake that will cast aside any nagging doubts about the wisdom of continuing to feed the machine. That’s the good news. The bad news is that the price that may have to be paid in terms of yields offered may have to go quite a bit higher.

Comments

[Firat Ünlü:]

Doesn't bode too well, but given that so many people seem to be in US bonds these days nothing surprises me anymore.
Can't wait for the UK auctions.

Jan 11 04:27 PM

[eileen:]

mls

Jun 06 07:24 AM