monetary-policy, bonds, governmentThe media is reporting a “disastrous” German bond auction failure today. Why is this event significant? When do these kinds of auctions fail, and why? Is there any historical precedence where similarities or distinctions can be drawn?
The price was too high - i.e. the yield was too low. The target yield was 2% for the 10-year Bund, and the market turned its nose up at that.
Note that it wasn’t a failed auction: it was not uncovered, it was covered, with a coverage of 1.1. This was achieved by retaining 39% for future open-market operations; in the past, 20% of such issues have been similarly retained.
As for its significance, it’s far too early to tell, and there’s no point in speculating here.
Most bond auctions have a lot more bonds bid for than are actually available. In this case, there was barely enough demand to sell the available bonds–after the government intervened.
That is a sign that the interest rate was too low to attract a good number of buyers. It suggests that the German government will have to raise the interest rate on the next batch of bonds it auctions.
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