Not breaking but more shocking that I didn't hear about it at all.
So what's next?
FTFA: Yields not expected to rise, sure...

http://www.ft.com/cms/s/9cbf7d56-b1bc-11....

Quote:

Bonds caught between supply surge and deflation

By David Oakley and Michael Mackenzie

November 13 2008 19:56 | Last updated: November 13 2008 19:56

For any government looking to raise money in the capital markets in the next few months, there was an ­ominous development in Germany this week.

A German 10-year bond auction failed – something more or less unheard of until this year – as cash-strapped banks and investors snubbed the government offering.

It is a clear sign of straitened times when a benchmark bond in one of the most liquid markets in the world cannot attract enough bids to reach its target amount.

Crucially, it raises serious doubts about whether governments can raise the vast amounts of debt needed to fund fiscal stimulus packages and bank recapitalisations in the current tough market conditions.

Any sign of waning demand may force up bond yields – putting further pressure on public finances when they are already under strain.

Nowhere is the issue more pressing than in the US.

Tony Crescenzi, strategist at Miller Tabak, says: “In a world with finite capital and where sovereign nations everywhere are in need of capital to finance their financial and economic stabilisation efforts, the substantial increase in Treasury supply could become manifested in higher long-term interest rates.”

Rick Klingman, managing director at BNP Paribas, adds: “There is no doubt that supply will matter at some point as the financing needs are staggering [in the US]. At the moment, supply is not a large factor with stocks in freefall.

“If equities and the housing market start to see some daylight at the end of the tunnel, then supply will become a factor and translate into higher yields.”

US Treasury bond supply is expected to hit record levels, in a range from $1,400bn to $1,750bn in the 2009 financial year, starting in October. In Europe, bond supply is forecast to rise to more €1,000bn ($1,247bn) next year – also a record high, according to Barclays Capital.

The extraordinary thing is that, in spite of this huge supply, most analysts expect bond yields will fall. This is because many analysts are now anticipating a deep and protracted global recession, and talk of deflation is even stalking bond markets.

Yields have fallen particularly sharply at the shorter-end of the bond curve, which is most sensitive to interest rate movements, because of the accelerating slowdown in the world’s economies.

Analysts say the economic backdrop is the key determinant of where yields will trade. At the moment equities are so unappealing to investors that bond markets appear more attractive, offsetting supply concerns.

Some government bond yields are also historically low, around levels last seen in 2005, and much lower than in June when inflation concerns dominated trade. For example, German 10-year Bund yields are trading at 3.63 per cent, compared with 4.68 per cent in June.

Riccardo Barbieri, a strategist at Bank of America, says: “In the unlikely event that yields should rise, which I would not expect, they are coming from a fairly low level.”

Germany – in spite of its fourth 10-year Bund failure this year – and the US are likely to be more successful in attracting investors and depressing yields, should the difficult conditions persist, than other countries as they have the most liquid markets and are seen as safe havens.

Analysts agree they will outperform smaller European countries, particularly the so-called peripheral nations of Italy and Greece, which have large levels of debt that could prove difficult to finance in a severe slowdown.

This has been apparent since the beginning of the year with benchmark yield spreads across the curve between Germany and Italy and Greece widening sharply to record levels. Even in the event of ­Italian and Greek bond yields falling, they may not drop fast enough to make up for the loss in tax receipts from their contracting economies.

In a scenario of interest rate costs being greater than growth, the stock of debt rises, making economies with debt-to-gross domestic product ratios of 104 per cent (in the case of Italy) and 95 per cent (in the case of Greece) unsustainable.

Meyrick Chapman, fixed income strategist at UBS, says: “This is a big issue and is a real problem for economies, such as Italy and Greece, which are carrying large amounts of debt.”

The moderate success of Italian auctions yesterday highlighted the potential problems for Italy as it was forced to pay investors higher yields for three benchmark bonds.

The Spanish government was also forced to pay investors more to cover its bond auction on Wednesday. Last week, Ireland struggled to raise money for a syndicated three-year bond, while Belgium has cancelled an auction in recent weeks.

“People are investing for preservation in these markets, not for returns, which means they want safe bonds,” says Mr Chapman.

Another problem for the governments is the competition from banks and financial institutions, which have sovereign guarantees yet offer much higher yields.

For example, this week the UK’s Nationwide priced a three-year deal at close to 100 basis points over gilts.

“The simplistic question is, why buy government paper when you can buy government-backed paper such as this for a much greater return?,” says Sean Shepley, fixed income strategist at Credit Suisse.

With an expected €1,600bn of bank guaranteed issuance in Europe alone next year, this could have a significant impact on investor appetite for government bonds.

Mr Chapman says: “In spite of the prospect of this huge issuance, yields are not being forced higher. This shows just how gloomy people are about the economic outlook.”

Copyright The Financial Times Limited 2008

German?! I didn't expect them to have the first failed auction! A 10-year no less, not exactly hugely long duration. Jeez, I really expected it to be Russia. Although, you have to wonder how many of these have to ocurr before a default on a payment. Seems like Ecuador is next up for that or perhaps Argentina or Ireland.

The Governments have painted themselves into a corner. Damned if you do, damned if you don't.

I've been wondering in the back of my mind about the scenario where bond purchasers have to choose between purchasing a bond, such as Fannie or Freddie, that now has a .gov guarantee, with higher return, than a .gov bond with a lower return.

What's the effective difference?

Money flows out of treasuries and into higher yields. Treasury yields go higher to get the money back, and the third party guaranteed bonds have to offer higher rates to get the money back, once again, and on and on and on in a negative feedback look that is quite frightening.

Pablo: Positive feedback loop. If the loop makes more of the same happen again, it's a positive feedback loop. If it works against what just happened and makes it less likely in the future, it's a negative feedback loop.

Sorry, I'm an engineer and that one drives me crazy.

Other than that, I totally agree with your post. :-)

Quote:

Money flows out of treasuries and into higher yields. Treasury yields go higher to get the money back, and the third party guaranteed bonds have to offer higher rates to get the money back, once again, and on and on and on in a negative feedback look that is quite frightening.

Yeah I don't know why we don't have interest rates spiraling out of control in a race to get whatever money's available out there. Maybe most people haven't realized that the gov't is backstopping everything yet?

four fails this year for Germany

Jasonkolb wrote..

Yeah I don't know why we don't have interest rates spiraling out of control in a race to get whatever money's available out there. Maybe most people haven't realized that the gov't is backstopping everything yet?

Patience GrassHopper.. the death spiral continues.. the US Gov't couldn't backstop all the defaulting debt if it tried.. all it can really do is stem the flow of vital fluid exiting the dying patient.

Quote:

July 11, 08...Spain has suspended an auction of sovereign bonds as investors take fright over the country's property crash and accelerating slide into economic crisis.

The treasury pulled an expected sale of 15-year bonds after probing the market informally, saying it would wait until credit conditions began to calm down. "We are not facing financing problems. We placed a successful three-year note on Wednesday," said a spokesman. http://www.telegraph.co.uk/money/main.jh....

Somewhere on TF, I remember talking about European bond failures with others, but cant find... there were a few countries I or someone listed...

AH - here:

Quote:

Hungary, which has been forced to turn to the International Monetary Fund to shore up its crisis-hit economy, also scrapped an auction for short-term government bills after only attracting Ft5bn ($22.5m) in a Ft40bn offering.

Analysts said Austria had dropped plans to launch a bond next week because investors wanted bigger premiums to offset the credit worries and fears over lending by its banks to eastern Europe. The Austrian Federal Financing Agency did not give a reason for the move.

Spain, another triple A rated country, and Belgium have cancelled bond offerings in the past month because of the turbulence, with investors demanding much higher interest rates than debt managers had bargained for. [http://www.ft.com/cms/s/fd782ada-a451-11....]

and this:

Quote:

India, NZ, Japan, Czech Republic and Brazil cancelled auctions this month too, FWIW. http://www.tickerforum.org/cgi-ticker/ak....

http://tickerforum.org/cgi-ticker/akcs-w....

what does this mean ?

"The extraordinary thing is that, in spite of this huge supply, most analysts expect bond yields will fall. This is because many analysts are now anticipating a deep and protracted global recession, and talk of deflation is even stalking bond markets."


If the bond yield fall and bonds are not selling, you will have to offer higher yields (sell the bond at much lower price )

So what the heck this writer talking about ?

you know, i saw that in the same FT Times that mentioned the Dubai property market. The bund failure story was buried in the back of the paper.

Waverider, the writer is an idiot.
This is the problem with locking onto an economic concept and refusing to adjust it for changing conditions; assuming that conditions will remain static. - In my mind, the classic example of this across the general population is the belief that the stock market will go back up in the not too distant future. Oh, it'll go up, but only after it goes considerably lower than where it is presently at.

We've had inflation/deflation threads on this board for a long time. While we went through an inflationary period over the last year, most of us here were expecting deflationary conditions. That is now upon us. But the massive new debt issuances by the govt could result in high inflation rates in the future.
And the writer is making a mistake in associating interest rates with inflation. If you look back to the late 20s/early 30s, you'll see that we had very high interest rates in a deflationary environment.

Wave, these clowns just don't get it. In a massive deflationary contraction, everything is getting liquidated - including T's. Available capital is shrinking as T supply is increasing. Yields are going 2x+. These governments are now acting like home sellers that are delusional/denial about what they can get for their home - consequently it lays idle (failed auction) and not sold until they either lower their price (raise yield) or the checks start bouncing...

Loudon, it's amazing to me how fast this is happening. I didn't expect T yields to start climbing this quickly.
Just a year ago, most of us on this board were talking about how slow things were to unwind. Now everything's accelerated. It's like the first three years of GD I are being compressed into three months.

Yup these writers have no clue. I think all govts. need money and they need a lot.


Bonds (German bonds which will be the last to default) are not selling and that means, bond mkt is saying -

1. Either the INFLATION is around the corner! Bond mkt thinks it's not worth buying bonds.

2. Or Germany will default. Highly unlikely. So risk of capital loss in nominal terms is almost zero.

just wait till that triangle on the tnx breaks....

I would imagine that higher yeilds caps equities quite well as well...

Quote:

But the massive new debt issuances by the govt could result in high inflation rates in the future.

As Loudon points out, there is limited capital for the T market as well--and that's shrinking as well. It's just soaking up existing debt.

The only way this is inflationary is if the Fed prints up money to buy it, or somebody takes out a loan to buy it.

>The only way this is inflationary is if the Fed prints up money to buy it

Sorry for the dumb question but how does the FED print money ? There are so many conflicting theories out there I am not sure what's "print" ? Are you saying literally print at the mint ? Otherwise how can they create money when the bonds are not selling ?

Jasonkolb wrote..

As Loudon points out, there is limited capital for the T market as well--and that's shrinking as well. It's just soaking up existing debt.

Yeah, we could get a situation where T yields stay low, but a other debt markets throughout the world get destroyed due to massive flight to safety.. so many potential dynamics here it's difficult to imagine all the possible outcomes.