Germany Failed To Sell Bunds Yesterday, Is Cold Approaching China Too?

FT Alphaville writes today at http://ftalphaville.ft.com/blog/2009/01/08/50901/german-bond-sale-failure-signals-trouble/ :

A German sovereign bond auction failed on Wednesday as investors shunned one of the world’s most liquid and safe assets 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 for plans by governments globally to issue a total 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%, amounted to the second worst auction on record in terms of demand.

Other countries in Eurozone do not have it easier, as the analysts at Nordea Markets note:

Ireland yesterday set the guidance on its new 5-year syndicated benchmark at mid-swaps plus 90bp. This represents a pickup of some 23bp in asset swaps vs. IRISH 4% Apr 2013. Austria, in turn, set the guidance on its new 5-year syndicated benchmark at mid-swaps plus 10-15bp. By reference, RAGB 3.8% Oct 2013 is trading at around flat vs. swaps. The wide guidance levels indicate that issuers are already aware that they have to pay notable pickup to get their new issues sold.

And Societe Generale notes today:

The weak demand at the Bund auction is bad omen for Thursday's SPGB and OAT auctions, especially as the total amount issued will be even higher (€12bn).

The U.S. was quite successful in placing 3 year notes yesterday. John Jansen at http://acrossthecurve.com/?p=2403 wrote yesterday night:

The bugaboo for the bond market is supply. The folks at the Treasury sprayed the market with $30billion of 3 year notes today. The auction resulted in a yield of 1.12 percent and came about 2 basis points cheap to levels which prevailed in the brokers market at bidding time. Many thought that the auction would be much sloppier and the result as presented has been judged a success.

Well, there is a big difference in risk for 10 years or 3 years...

Do imbalances matter? I am more concerned about the U.S., indeed. But who knows how painful it may be for conservative Germany with idle capacity, as exports drop and highly leveraged banks have exposure to Central and Eastern Europe? Yves Smith at http://www.nakedcapitalism.com/2009/01/ny-times-china-cooling-on-us-debt.html has done a good job by focusing on potential China demand for U.S. paper...

Societe Generale has an opinion regarding the U.S. Treasuries today:

The vast financing need raise some concern about crowding out effects and potential “indigestion problems” in the Treasury market. We view the Treasury issuance as a substitute for private borrowing which at present is nearly nonexistent. Rather than crowding out private investment, the government is replacing the large hole in private investment that was put in place by the financial collapse and the credit
freeze.

Clearly, indigestion problems in the Treasury market would be very problematic for US policymakers. But with Treasury yields at 2.5%, that is a remote risk at present. Even with the extremely weak economy, our fair value models put the 10yr Treasury yield close to 3.5%. The 100 bp overvaluation reflects very strong risk appetite for Treasury debt and ‘zero’ evidence of indigestion problems or crowding out effects.

For now, the large issuance of US government debt appears to be exactly what investors want. Ironically, the risk for Treasuries would materialize when risk appetite returns and investors shift to risky assets including spread products. We believe the right move for the Treasury would be to step back and reduce its issuance or else it will have to compete for private capital, pushing yields higher. Given the sizeable overvaluation of Treasuries, that shift could turn into a fairly rapid and disorderly adjustment. A possible solution at this stage would be for the Fed to begin purchasing long-dated government debt in order to maintain low borrowing rates.

If cold is approaching China too? Export figures from Taiwan and Australia to China, that were published today, may be pointing to that.

It would not be well for risky assets ...