Investors Say “Nein” to German Bund Auction

Those familiar with the shell game or three card monte are aware that in order to keep the game going new players with new money are required to enter.

In the world of global finance a wide array of iterations of these games are being played literally each and every trading day. Who often plays the role of both dealer and participant? The central banks.

Without these entities involved in the markets, there is no doubt that interest rates would be substantially higher than current levels. The critically important questions facing all investors are the following:

  1. When do rating agencies downgrade sovereign debt?
  2. How far do the rating agencies go in downgrading the sovereign debt and over what time period?
  3. How much “increasingly worthless” fiat currency will central banks print to monetize their debt?
  4. When do investors just walk away and effectively say, “we are no longer playing”? In the process, how high will interest rates rise and how will the sovereign entities fund themselves?

Be mindful that the games currently being played can last a very long time. Patience is not only a virtue but also a requirement while navigating this slope along our economic landscape.

Do not look for those covering the markets to aggressively highlight the risk within point number 4 but rest assured the risks and implications of failed government bond auctions are very real. We recently witnessed just such a situation. What country failed to sell its desired size of government bonds? A peripheral nation in Europe? Nope. None other than Germany had a failed government bund auction. Reuters provides further highlights on this development in writing, Investors Balk at Low German Yields, Bunds Fall,

LONDON, April 11 (Reuters) – Bund futures fell on Wednesday as record low auction yields for Germany’s new 10-year bond illustrated the limits of investor appetite for ultra-low yielding debt. . .

German 10-year yields rose 7 basis point to 1.71 percent, climbing away from the record low of 1.637 percent that was matched in the previous session. The country’s debt sale failed to draw bids worth the full amount on offer, though the result was not as poor as that seen last November when the previous Bund was launched.

A German 10 year at 1.71%. A 10 year U.S. Treasury at just above 2.0%. Value? In a world in which our central bankers practice financial repression, the question of value has been rendered meaningless.

While central bankers play their games, the key question all investors face is one of finding meaningful returns and protection. I would maintain that in the world of government bonds circa 2012 there is little of the  former and a decreasing amount of the latter.

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

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