German bond sale’s fate signals trouble ahead

[Beet]

By David Oakley in London

Published: January 7 2009 13:30 | Last updated: January 7 2009 20:45

A German sovereign bond auction failed on Wednesday as investors shunned one of the most liquid and safe assets in the world in a warning for governments seeking to raise record amounts of debt to stimulate slowing economies.

The fate of the first eurozone bond auction of 2009 signals trouble ahead as governments around the world hope to issue an estimated $3,000bn in debt this year, three times more than in 2008.

The 10-year bonds failed to attract enough bids to reach the €6bn the German government wanted. Bids of €5.24bn, a cover of only 87 per cent, amounted to the second worst auction on record in terms of demand.

Such developments were rare before the credit crisis. Before the seven German bond auctions that failed last year, the last German bond auction to fail was in July 2000 after the dotcom crash.

Analysts said the vast amount of supply is deterring investors and a growing number of countries, including those with deep and mature bond markets, such as Germany, the UK and Italy, are struggling to attract buyers.

The Netherlands has seen bond auctions fail, the UK and Italy have been forced to offer investors higher yields to meet their auction targets, while Spain and Belgium have cancelled offerings because of a lack of demand.

The German finance agency admitted that investor appetite for government debt had waned, although insisted the auction was “not a disappointment”.

Meyrick Chapman, a UBS fixed-income strategist, said when a German bond auction failed it “does suggest there may be trouble ahead for other governments wanting to raise money in the debt markets. Before the financial crisis, German bond auctions just did not fail.”

However, analysts stress the heavy supply is being offset by fears of deflation and recession, which are typically supportive to government bonds and have depressed yields, which have an inverse relationship with price, to historical lows.

The UK on Wednesday successfully sold £2bn in gilts due to mature in 2038. But Robert Stheeman, chief executive of the UK Debt Management Office, has warned that the large supply of debt could deter buyers of gilts. Britain is planning to raise £146.4bn in bonds this financial year – three times more than last year.

[Sam Spade]

drip, drip, drip...

[Jacobtm]

Time to...

Raise interest rates?

[J. J.]

Time to calm fears.

[Sam Spade]

Time to...

Raise interest rates?

Borrowing billions/trillions to spend on your economy will greatly increase your debt load and also thus your interest payable vis-a-vis the budget.

Why would you want to increase that interest payment through higher interest rates when it's already increasing through greater amounts of debt?

And what would happen if that interest rate skyrocketed through some device of its own? 

TSHTF

[opebo]

Just print the money.

[Vasall des Midas]

In other news, the government wants to buy 25% of Commerzbank (and thus, basically, a veto right) at well over the current market rate.

[Sam Spade]

Just print the money.

Just another drop in the proverbial bucket.

[dead0man]

Just print the money.

I think the Germans tried that one once.

[Vasall des Midas]

In other news, the government wants to buy 25% of Commerzbank (and thus, basically, a veto right) at well over the current market rate.

Like, 8 times the (pre-announcement) market rate. Part of that money coming from the earlier bailout package.

I would like to point out here that Commerzbank was (wholly) nationalized to keep it from going under in 1932. And sold off again in 1937.

[Judäischen Volksfront]

Just print the money.

It's hard to see the ECB agree to print Euros for Bunds given that the Mediterranean countries still haven't kicked the habit of printing money in their pre-Euro days.

[Jacobtm]

Borrowing billions/trillions to spend on your economy will greatly increase your debt load and also thus your interest payable vis-a-vis the budget.

Why would you want to increase that interest payment through higher interest rates when it's already increasing through greater amounts of debt?

And what would happen if that interest rate skyrocketed through some device of its own? 

TSHTF

I was saying that if Germany is having trouble selling their bonds, we might have to offer higher returns for investors on our bonds if we plan on spending $1 trillion on a stimulus package.

[opebo]

Just print the money.

It's hard to see the ECB agree to print Euros for Bunds given that the Mediterranean countries still haven't kicked the habit of printing money in their pre-Euro days.

Well, the more money you print, the less depression you get.  Its up to the ECB.

[frenger]

Just print the money.

It's hard to see the ECB agree to print Euros for Bunds given that the Mediterranean countries still haven't kicked the habit of printing money in their pre-Euro days.

Well, the more money you print, the less depression you get.  Its up to the ECB.

Deficit monetarization is prohibited by the Euro treaties.
The ECB should print money, but they most certainly should not use it to buy long term debt.

[opebo]

The ECB should print money, but they most certainly should not use it to buy long term debt.

Why not?

[frenger]

The ECB should print money, but they most certainly should not use it to buy long term debt.

Why not?

Because it has distortionary effects. The central bank should limit itself to the nominal side of the economy. Having it buy long-term debt would bring it into the real side, and give the privileged whom the central bank would buy debt from into an unwarranted advantage. It would also create all sorts of incentives for rent-seeking. Besides, there is no need to as the current monetary policy tools are more than enough to do the job.

[opebo]

The ECB should print money, but they most certainly should not use it to buy long term debt.

Why not?

Because it has distortionary effects. The central bank should limit itself to the nominal side of the economy. Having it buy long-term debt would bring it into the real side, and give the privileged whom the central bank would buy debt from into an unwarranted advantage. It would also create all sorts of incentives for rent-seeking. Besides, there is no need to as the current monetary policy tools are more than enough to do the job.

Yes, I don't see why there is any need to create debt in a deflationary environment, as any spending can be just done with fiat currency printed up for the occasion.

[Matt Damon™]

We've been over this before, Opie. One word: Hyperinflation.

[opebo]

We've been over this before, Opie. One word: Hyperinflation.

So its that easy to end the deflation caused by our depression?  I don't think so.

[Matt Damon™]

We'd get stagflation on crack with your proposal.

[opebo]

We'd get stagflation on crack with your proposal.

No, we'd get reflation and good economic growth.

[War on Want]

We'd get stagflation on crack with your proposal.

No, we'd get reflation and good economic growth.

I wouldn't say good economic growth but it would certainly be decent and it would lead to hyperinflation, just inflation. Some inflation isn't a bad thing...

[GeorgianGurl]

can we have a "delete account" button please?

[wan]

http://news.yahoo.com/merkels-coalition-loses-german-state-230312138.html