Germany's Failed Bond Sale - Ominous Sign?

On January 7th, an auction of 10-yr bonds by the German government failed to attract enough bids to meet its €6 billion goal. According to the Financial Times (German bond sale’s fate signals trouble ahead), "bids of €5.24bn amounted to the second worst auction on record in terms of demand." This is a particularly ominous sign for governments around the world that hope to raise an estimated $3bn of debt in 2009.

Several countries should be concerned by this recent development, including the US (obviously!), the UK, Spain, Italy, and Belgium. The FT notes that Spain and Belgium had to cancel recent offerings due to a lack of demand, while the UK and Italy were able to meet their auction targets, but at higher yields than initially targeted.

Undoubtedly, the US could face similar pressures in the weeks and months to come. Two key factors will likely keep rates low in the near-term: 1) Significant risk aversion on the part of investors and 2) the Fed's signaling that they will buy longer term treasuries. However, an absence of foreign buyers (i.e. Japan and China) in upcoming auctions and growing concern over the US's balooning budget deficits (i.e. "trillions of dollars for years to come" as suggested by Obama), will most certainly undermine these countervailing forces in due time.

As Jim Grant likes to quip, treasuries are poised to offer "return-free risk." Absent a Japan-like depression in the US, I'm guessing that he will most certainly be proven correct.