Posted on 11/23/2011 8:43:14 AM PST by jpl
Germany saw one of its poorest debt sales on Wednesday in what was seen as a failed auction by many market participants amid fears the eurozone’s debt crisis is spreading all the way to Berlin.
Marc Ostwald, at Monument, said “I cannot recall a worse auction ... If Germany can only manage this sort of participation, what hope for the rest. Yields are at completely the wrong level.”
Mr Oswald said the bid-to-cover ratio was only 0.65 times as the German debt agency sold just €3.644bn of its new 10-year Bund of the €6bn targeted.
The Bundesbank retained a massive €2.356bn, which it will plan to sell over the coming days in the hope market sentiment improves. If the Bundesbank retention is included, the bid-to-cover ratio was a modest 1.1 times.
Many market participants consider this an auction failure although some say technically it is not, as by retaining its own bonds the Bundesbank has pushed the bid-to-cover ratio above 1.0 times.
The average yield for the 10-year bonds was 1.98 per cent.
The euro fell sharply against the dollar after the results of the auction were released. The single currency dropped 1 per cent to $1.3379 and lost 0.6 per cent to Y103.30 against the yen. Against the pound, it was down 0.5 per cent to £0.8595.
Annalisa Piazza at Newedge Strategy said: “The auction was extremely poor. Despite the new paper looking attractive, the extreme richness of the German debt weighed on today’s demand.”
The weak sentiment in the capital markets was underlined by the latest economic figures from the region which showed eurozone industrial orders plunged 6.4 per cent in September compared to a month earlier.
The biggest decline was in Italy – down 9.2 per cent – but France, Germany and Spain were also weaker by between 4 and 6 per cent. It was the biggest month-on-month fall in orders since December 2008, following the collapse of Lehman Brothers investment bank.
Standard & Poor’s warned on Wednesday that credit ratings in the eurozone could come under renewed pressure if large parts of the currency area slip back into recession, as expected, next year.
Speaking at a conference in Dublin David Beers, the man behind S&P’s downgrade of the United States, said: “The financial dynamics unleashed by the ongoing confidence crisis, in Standard & Poor’s view, have heightened the risk of renewed recession in a growing number of eurozone members that potentially could put additional downward pressure on (the) euro area’s sovereign ratings.”
The fear spread across trading floors as Germany started to trade like a risk asset with Bund yields rising more or less in line with French, Italian, Spanish and Belgian yields.
One trader said: “This poor auction reflects the worries about Germany and the fact that many clients are now asking: ‘Is my money safe even in Germany if the euro is going to collapse? What will happen to my euro-denominated debt?’.”
The European Central Bank was seen intervening in the markets again, but it did little to ease tensions.
The credit default swaps markets, which are used to insure bonds against default, also saw jumps in price amid the growing concern over the eurozone.
Italian 10-year bond yields rose to 6.92 per cent, up 10 basis points, Spanish yields rose to 6.65 per cent, up 5bp, German yields were 2.03 per cent, up 8bp, French yields stood at 3.62 per cent, up 9bp and Belgian yields rose to 5.20 per cent, up 13bp.
Italian CDS prices jumped to 558bp, or the cost of $558,000 to insure $10m of debt annually over five years, up 7bp on the day, Spanish CDS stood at 448bp, French CDS at 245bp and Belgian CDS at 361bp.
Significantly, the cost to insure German bonds against default has jumped to 107bp, above those of the UK.
Elsewhere, stresses were seen in the currency swap markets with the cost to swap euros for dollars at the highest level since the end of 2008 amid a growing clamour to get out of euro-denominated assets.
One trader said: “The only reason the euro is holding up is because of some repatriation, but we are starting to see the sell-off of the currency. This could be the start of the end unless the policymakers act swiftly.”
Crerdit default swaps....LOL!.Same old..s**t..like they think that they’re gonna be covered..
Ping.
If someone is in fear that their loaned money might be defaulted on, or paid back as a lesser % of the loan, higher interest rates might not give the loaners much more incentive to loan the money. - tom
MF Globals gone and bankrupt there’s no money left to buy into a failed euro.
I believe the world is waking up and smelling ... inflation. A 10 year yeild of 1.98 means that the “bet” is that a $1 (I dont have the sign for euro, but you get my drift) today will be worth more than $0.50505050 (in todays dollars) in 10 years ... and that whatever the difference is what they will actually earn.
If they are having problems selling this, then people are fearing that inflation will average over 7% (roughly 7% being the number where $1 today is worth $1.97 in 10 years) over the next decade, which is a natural reaction when borrowing consumes more and more of GDP. We have been living for years off the assumption of low single digit inflation (see COLA - Cost of Living Adjustment is the inflation factor in most contracts). We are now going back to the wild late 70’s where people are seeing runaway inflation ... numbers in the teens or even higher, among major economies.
To stem inflation, you need to make money less available ... tighten the supply, by raising interest rates, but our hands are tied on that, because raising borrowing rates cuts off capital to businesses, which slows down hiring and purchases.
In short, we spent ourselves into a corner and blocked off our access to an escape route. The only real answer left is to cut off the supply for bonds ... which means governments need to spend less, and therefore have fewer bonds to sell.
Investors need to go on strike to protest the corruption.
Pull your money out of the banks and markets. Invest directly in small businesses with plenty of collateral. Get directly involved in the business that you invest in so you don’t get ripped off. Get a written contract for salary in lieu of interest or a buy-back that allows you to exit the contract at a profit.
Don’t be one of the bag holding rubes when the banks go bust.
failed auction = failed EUrotopian socialist experiment
yitbos
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