Insight: Crowded debt sales risks causing ‘auction fatigue’

By Gillian Tett

Published: June 4 2009 17:09 | Last updated: June 4 2009 17:09

A few decades ago, when global financial markets rocked to a more gentlemanly tune, many western governments took an informal break from the business of selling their bonds during the summer.

For back then, it was presumed pension fund managers – or anyone else with a penchant for government bonds – would spend August on the beach. And the media-shy bureaucrats who typically work at government debt management offices usually presumed they would have plenty of time during the rest of the year to go about selling bonds.

No longer. This year, according to the Organisation for Economic Co-operation and Development, projected gross issuance by OECD governments will jump to almost $12,000bn of debt, up from $9,000bn two years ago (and many times the level a decade ago.) The US alone is projected to sell almost $8,000bn, in gross terms.

So deep in the bowels of western DMOs, some officials are now scanning the calendar and wondering how they can organise all those looming debt sales. Most governments hold auctions on particular days of the week and there are only 52 weeks in the year.

Thus, even if the DMOs cancel their summer holidays – which some will – it may be tough to schedule all these looming sales. No wonder some western government officials are starting to mumble about the risk of “auction fatigue”, or the chance that investors get so overwhelmed with these sales that they go on strike. Nor is it little surprise that some western government officials are quietly debating whether they can can dramatically expand the size of individual auctions, to get these bonds sold, without creating a market glut, or panic.

Thus far, thankfully, there is little sign of any such panic. This week, one government auction of short-term treasury bills failed to get any bids in Latvia, sparking jitters in East European markets. But that auction “fail” reflected local concern about looming devaluation, and so it may be a “one-off”. Other wobbles in the US or European markets have also been quickly snuffed out, partly due to adroit footwork by the DMOs.

But the gyrations of the US treasuries market last month shows just how jittery the tone of the market is. And as the DMOs know, the logistical challenge of organising all those auctions to sell all those trillions of debt is unlikely to get easier anytime soon.

In part, that is due to the maturity of debt. Some countries, such as the UK, have a tradition of selling long-dated government debt to local pension funds, which reduces the need to roll over the existing debt stock too freque- ntly. In the UK, for example, the average maturity of government debt was 14 years at the end of 2007, or just before the crisis broke. Australia, France, Austria and Greece also have long(ish) maturities, of between seven and 10 years.

But other European nations such as Hungary and Norway, have average maturities below five years. Meanwhile, the average US maturity in late 2007, was just 4.7 years and will almost certainly decline further. This year, the OECD projects that no less than 70 per cent of US issuance will be short term. That leaves the treasury market now exposed to a mild version of the same problem that plagued conduits or structured investment vehicles that relied on short-term funding in the commercial paper market: namely “rollover risk”.

Mindful of this, debt management officials on both sides of the Atlantic are brushing up on their marketing skills. A few weeks ago Citi organised a novel conference in Tokyo at which different European DMO officials were each given a chance to present a sales pitch for their own debt to local Asian institutions.

Until quite recently, that type of event might have been viewed as unseemly, or unnecessary, by many DMOs. After all, Japanese investors used to stick to buying US treasuries or German bunds, and European DMOs shied away from promoting themselves in a competitive or vulgar manner.

But Asian investors no longer consider treasuries to be the only option in town – and European governments are waking up to the reality of competition. Indeed, the gossip in some government bond circles is that the American debt officials will soon be forced to get more pro-active in marketing their wares too. If not, they may face more jitters soon.

Thus far, I should stress again, such jitters have not turned yet into anything serious. Government officials have danced through this minefield relatively well, on both sides of the Atlantic. And if they continue to do so for the rest of the year, some of those faceless bureaucrats in the debt sales teams may deserve a medal.

But make no mistake: the potential for an accident is rising, as the auction calendar fills. Fingers crossed that the phrase “government bond auction fatigue” is not something that ever hits the headlines of the mainstream press this year. Even – or especially – in those dangerous summer months.