Bonds - Latest News

Bond Overview

The German Bund market continued to edge higher over the last week, retracing most of the losses seen the week prior. The 2.00% yield level has for now served as a short-term cap on yields, a floor for the Bund future.




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Thoughts from the Trading Floor 31st January 2012

From a technical perspective, German Bunds favour short-term bulls. The market has held the 2.00% yield level, having tested here on several occasions last week. The corresponding bounce has now seen the market reach levels close to the all time futures highs, albeit it is still around 100 ticks away from the all time high. This morning has seen the market ease somewhat from the stronger levels seen yesterday, bears will need to see the 138.50 level give in order to confirm the recent move higher as the end of the correction. If the market can hold above the 139.00 handle today, it is likely we will see a test of the all time futures highs at 140.23 soon this week.

Although the markets believe that the Greek PSI talks will ultimately be successful and stave off a disorderly default of Greek debt, the situation represents somewhat of a tail risk for the market for the reason that the markets have ignored the risks of this happening. This is mainly due to the fact that a potential disorderly default of Greece will have a huge impact across the Eurozone risk markets and logically one would assume that the Greeks and the Eurozone will do whatever is necessary to avoid this form occurring. However given the history of the debt crisis so far and the ineptitude shown by the Greeks almost every step of the way, we cannot assume that all will end ok. Currently, as this situation stands, we are expected to find out the talks have been effective in reaching a conclusion this week.

Another possible tail risk to look out for has been the gradual creep higher in Portuguese borrowing costs. The market is now starting to reach levels consistent with where the second Greek bailout became an inevitable conclusion. If this scenario starts to play out we will probably see some short term risk off action in the markets as participants will have to reach the realisation that a second bailout for Portugal will not work and the inevitable restructuring of debt, as per the Greek situation, will have to occur.



Bull View

Bulls will need to maintain support above the 139.00 handle if they are to maintain short term bullish momentum.


 

Bear View

Bears will need to see the 138.50 level give if they are to start to affect a short term shift in momentum, and mark the rally over the last week as a correction.

 
US Treasuries- Latest

Bond Auctions Explained








Governments sell bonds of different types and durations to investors by way of an auction process in order to finance their operations. These bond auctions have become more and more important for our traders of late, particularly in light of the peripheral European debt crisis. Each government has its own process by which it sells bonds to the market. However, the individual processes tend to be similar in nature which allows our traders to interpret them effectively. Below is a summary of the US Government ’s bond auction process which serves as a useful template for other government bond auctions.

The US Government issues four different types of securities: Bills (maturity of less than 1 year), Notes (maturity of 2, 3, 5, 7 or 10 years) Bonds (maturity of 30 years) and Treasury Inflation Protected Securities (TIPs – 5, 10 and 30 years). These securities are sold by way of an auction process that determines their rate or yield and involves a 3-step process:

 
  1. Announcement

The Treasury announces a schedule of pending auctions together with the following:

  • Amount to be auctioned
  • Auction date
  • Maturity date
  • Terms and conditions of the offering
  • Customers eligible to participate
  • Non-competitive and competitive bidding closing times

  1. Auction

The Treasury receives bids for the bonds in question from both institutions and individuals. Bids are either non-competitive (you bid for and receive that amount of bonds at the auction – up to a limit of $5 million – at the yield set at the auction) or competitive (you specify a yield at which you wish to receive bonds but are not guaranteed to get them. If your bid is less than or equal to the high yield determined at the auction, you will receive your bonds; however, your bid may be prorated if your bid equals the high yield.)

Direct bidders are Primary Dealers and Financial Institutions that place their bids directly with the Treasury. Indirect bidders represent those that do not go through Primary Dealers. Indirect bids are assumed to be a proxy for purchases by foreign central banks and used to draw inferences about such banks’ continued willingness to buy government bonds.

  1. Issuance

At the close of an auction, the Treasury accepts all non-competitive bids and then accepts competitive bids in ascending order in terms of their yields (lowest to highest) until the quantity of accepted bids reaches the required amount. All bidders will receive the same rate or yield.

 

Auction Results

Upon the conclusion of a government bond auction the results are released including:

  • Amount issued
  • yield
  • price
  • Amount of competitive/non-competitive bids tendered/accepted
  • Amount of direct/indirect bids tendered/accepted
  • Bid/cover ratio – the total amount of bids tendered divided by those accepted

As with all economic indicators, the financial markets and our traders set expectations for how well or otherwise a bond auction will proceed. As the results are released, the markets will react to the new information until it is reflected in the price of the underlying securities and other associated markets.