Funding Government Deficit

In this auction, the government would fall short of funding its deficit. In the next auction, it would offer a higher interest rate to make investors more willing to lend.

As an aside, this is not currently a problem in the US. Yields on US government bonds are near rock-bottom right now, yet lenders are clamoring to buy them.

auction? offer a higher interest rate?

lol

tell us more about the coupons on bonds and accepted yields at auction

Your wish is my command.

At auctions for government bonds, investors decide how high to bid by considering two properties: The bonds' time to maturity and their coupon. Investors then compare this to their own time preference: What does the annual yield of their loans have to be so that $100 in the future, plus compound interest, plus appreciation, minus the statistically-expected loss from default, equals $100 now? Hence, from the expected future benefit, investors calculate backwards to get the maximum price the government's promise is presently worth to them.

With that in mind, I can amend my earlier answer as follows: Unless the government has lost all its credibility with lenders, it can always sell all of the bonds it offers. The question is at what price. But that doesn't change the substance of my earlier answer: Both reactions, accepting a lower sales price and offering a higher coupon, have the effect of increasing the bond's total yield.

There was no substance to your earlier remark because you neglected to mention, at that time, the nexus between coupon yield and price or that the range of yields ie prices that an issuer accepts at auction depends upon how much it is willing to pay and has nothing to do with considerations of bumping up the coupon next time.

Nice recant though.

I'm glad you got this off your chest, fobvious. I hope you feel happier now.

I'm thoroughly delighted at the merest thought of your gracious acquiescence Thomas.

Thank you.

However, I remember Germany auctioned its own debt in November 2011 but received bids for only 65% of the offering.

That is correct. While I have not researched the details of that auction, I would guess that not enough bidders were willing to pay the price of the initial public offering. (That happens sometimes in other auctions, so perhaps it happened there.) I'm sure they could have sold all their bonds at some lower offering price.

An IPO ( initial public offering) refers to equity issuance on a stock market by a private company, not government debt obligations.



Bond auctions are conducted on the basis of bids accepted over a range of yields and the accepted yields are reflected in the price each investor pays. There is no "offering price".

The bond issuance was under-subscribed, little wonder at 1.98% p.a. for 10 year bunds.

Thank you for correcting my English vocabulary. What do you call the initial bidding price at an auction?



Oh, are you now saying they would have sold them at a higher yield? It certainly sounds like you do.

Your "English" is derived from the equity market, not the bond market.

There is no "initial bidding price".

Bond auctions are not conducted on the basis of price.

Bidders select the face value volume of stock they desire at various yields.