On March 11, an auction was held to place €5 billion in 10-year German government bonds. The outcome was decidedly negative, as the auction resulted in the placement of only about €3.8 billion—out of the €5 billion offered—at a yield of 2.89%, a significant increase from the 2.73% recorded in the previous auction.
The media noted that the partial placement will have no practical consequences, as the federal debt agency, the Deutsche Finanzagentur, will place the remainder on the secondary market—a mechanism designed to prevent the depreciation of bonds during periods of high volatility, which does not exist in Italy.
This is a valid point but seems reductive and certainly does not contribute to a better understanding of the situation.
Explanations in the media
Bunds, or rather Bundesanleihen, German government bonds, have been considered for years the safe public investment in Europe. The very concept of the spread—nothing more than the yield difference between 10-year German and Italian government bonds, the bane and blessing of our public finances—is based on the view of the Bund as a risk-free investment; this differential relative to German government bonds, the infamous spread, would therefore end up measuring the riskiness of our country.
A risk-free asset is the obvious safe haven in turbulent times; traditionally, this has been the strength of the dollar rather than gold—assets that are in greater demand when markets shy away from risky investments—precisely the situation that has arisen as a result of the U.S./Israeli attack on Iran.
Given the auction’s disappointing outcome, the explanation some have offered—namely, the volatility generated by the clashes in the Gulf—certainly seems inconsistent with the image of German government debt as a safe haven, and furthermore appears at least partial.
The media have also noted that this is not the first instance of a deserted auction for German government bonds. It must be argued, however, that previous unsold auctions, which occurred when rates were nearly zero thanks to Quantitative Easing, were the result of a phase that ended long ago and has nothing to do with the current situation.
Brief Considerations
The auction result must be viewed within a context that is far more problematic for Germany than in the recent past.
On the one hand, there is the expectation of increasing reliance on financial markets. In contrast to a past in which Germany boasted a very restrictive debt policy—and thus relatively limited bond issuances—the government intends to support the economy with an injection of public funds directed primarily toward infrastructure and military production, inevitably worsening the public finance outlook, especially with initiatives that do not inspire particular enthusiasm among analysts; particularly regarding defense investments, whose economic impact is not easily quantifiable and will certainly be weakened by arms purchases abroad, which will therefore not help boost the German economy.
On the other hand, this economic policy requires a greater quantity of Bunds on the market and necessarily implies offering higher yields to attract investors in a market where other issuers offer attractive yields; consider the U.S., which, as this note is being written, is paying approximately 4.28% on a safe 10-year bond, although the yield on U.S. bonds must be viewed in the context of the euro/dollar exchange rate trend.
The military clashes in the Persian Gulf therefore only partially explain the outcome of the auction in question, primarily in relation to fears that a possible prolongation of the conflict could weigh on the price and availability of oil and gas, thereby creating inflationary pressure; from this perspective, expectations of rising interest rates may have contributed to the hesitation of potential buyers, but this explanation is overly simplistic and, as already noted, quite incomplete.
Conclusions
The outcome of the March 11 Bund auction could be viewed as a curious episode, of interest only to industry specialists, but that would be to miss its symbolic significance.
Certainly, a deserted auction does not portend a problem with German debt but, in the author’s view, confirms the fading of the Bund’s image as an expression of a rock-solid economy that shuns debt; rather, it accurately represents a country that has failed to articulate a credible economic policy and consequently ends up seeing its advantage on financial markets eroded, primarily in terms of financing costs.
If we consider that we are writing about Europe’s largest economy and recall that the second-largest economy, France’s, is burdened by decidedly problematic public finances—which are certainly not improving given the current political instability—the overall picture is that of a continent lacking clear points of reference and a shared vision for the future; in this context, it is not surprising that Italy, characterized by a stable government and prudent management of public finances, is being rewarded—a consideration all the more gratifying when we recall the treatment our country has received from financial markets in recent years.
