German Bond Auction Fails to Attract Enough Demand

Weirdly enough, nobody mentioned this on the blogosphere, but I think it's a major piece of news.

With all the major states in the world trying to borrow and with all the savers' investments being wiped out and so many people deeply into dept because they have borrowed for their mortgages, for their cars and in some countries, to pay for their studies and even to fuel their cars with credit cards, it is going to be probably very tough for government to raise money. Basically, there are no savings left to tap into!

So what is going to happen when auctions fail in other countries? It is likely that yields will skyrocket, and that governments will sell their bonds to their central banks, thus creating a massive amount of inflation. This is what I believe is going to happen in the US.

For this particular case of Germany, the main reason why the auction wasn't successful enough (in my opinion) is that the Euro is a common currency for many countries, and that it doesn't make sense to pay more (get a lower yield) on German Bunds than say on French bonds. The two countries are probably going to have the same fate in the next 10 years. Hard to believe that one would default and not the other.

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 U.K. is planning an unprecedented 146.4 billion pounds ($221.1 billion) of debt sales in the fiscal year ending March 31. The government today sold 2 billion pounds of 4.75 percent bonds due in 2038. The securities yielded 3.98 percent and investors bid for 1.72 times the debt offered.

The U.S. sold a record $30 billion of three-year notes today yielding 1.2 percent and attracting bids 2.21 times the amount offered. President-elect Barack Obama said yesterday he expects to inherit a $1 trillion budget deficit and that similar shortfalls are in store “for years to come” as the government grapples with a recession and other spending demands.