On That Failed German Bond Auction

Includes: ERO, EWG
by: Cullen Roche

There’s quite a bit of buzz swirling around due to the failed auction in Germany yesterday and in recent weeks (via ImarketNews):

GERMANY: German debt agency spokesman tells MNI: – Acknowledges 3rd failed auction in December for Germany – Blames nervous market conditions and high volatility for auction fail – Failed auction not a problem for financing debt & austerity in Germany.

This shouldn’t come as a huge surprise though. Anyone who understands the vast differences between the US monetary system and the EMU monetary system knows that the countries using the euro are revenue constrained. They are essentially the equivalent of states within the USA. They do not have the ability to create their own currency. They must always obtain a revenue source.

This is why there truly are bond vigilantes in the EMU. The USA is different, however. Auctions don’t fund anything in the USA. The auctions merely serve as a reserve drain that helps the US government remove reserves from the system (helping the Fed hit its target rate) while also convincing Congress that we are “funded” (which is nonsense since we can never be under “funded”).

So, yesterday many investors were frantic over the potential for the 10 year treasury bond auction to fail in the USA. After all, if Germany, the safehaven in the EMU can suffer failed auctions it’s only a matter of time before the USA begins suffering failed auctions, right?

Not even close. Yesterday’s auction was well oversubscribed with a Bid-to-Cover Ratio: $61,332,371,400/$21,000,017,400 = 2.92. 1.0+ technically suffices so at 2.92 the reserve forecasters at the NY Fed continue to do their job of tracking down reserves and ensuring that the government auctions off the correct amount of bonds to execute the reserve drain.