bond issuance results v bond futures prices?

[brut]

if the germans can;t sell their bunds at auction, why is the euro bund up? does a lack of demand at auction not represent a loack of demand for the security full stop? or am i missing something obvious >?

 

[Rhody Trader]

I'm not up on the specifics of Bund futures, but I'm pretty sure they work much like US Bond futures. That means that one can deliver any of a number of different possible cash bonds against the futures contract, with one of them being optimal (cheapest to deliver - CTD). The current on the run bond is very rarely the CTD, and only represents a fraction of the total amount of Bunds outstanding, so really it doesn't have a great deal of specific impact on the futures.

 

[brut]

thanks for your reply. i'm still confised though: i understand the bonds being issued are not neccesarily CTD for the future, so there will not be a demand from futures market deliverers per se. but why would there be a high demand for the buy side of futures contracts, yet no demand for the cash bonds at issuance ?

ie if people want delivery of the CTD in the futures market, why don;t they want any cash bonds at all ? whats the differnce?

 

[Rhody Trader]

One possibility here is that the banks may been long in the when-issued market for the bund issue and had shorted the futures to hedge. But it could be something else as well. There is a lot of complexity when it comes to the fixed income market. There are all kinds of mechanical things going on which have little or nothing to do with what we would normally call supply/demand considerations.

 

[tripleogstar]

thanks for your reply. i'm still confised though: i understand the bonds being issued are not neccesarily CTD for the future, so there will not be a demand from futures market deliverers per se. but why would there be a high demand for the buy side of futures contracts, yet no demand for the cash bonds at issuance ?

ie if people want delivery of the CTD in the futures market, why don;t they want any cash bonds at all ? whats the differnce?

Most people in the bond market don't actually want to deliver the CTD bond, thats why most people roll over to the next contract. But the small percentage of traders who do want to deliver, only deliver to take advantage of cash and carry arbitrage opportunities.
You also have to remember that at the auction, you have many participants such as pension funds etc and they are more strategic and long term players. So if they feel that the market is over supplied, they just won't bid at auction, hence the auction flops.
The futures contract is used primarily to hedge, but when people speculate on it, they will be looking at so many factors when it comes to auction. They will want to know wot the bid to cover ratio is in comparison to previous auctions, if it is bad but not as bad as previous auctions then the contract will not fall much.

 

[Martinghoul]

What precisely is your question?

Firstly, there's no real WI mkt in bunds. As to the cash bond vs the futures, there's always some basis which is determined by, simplistically, balance sheet availability. However, even during the worst times (like end of 2008) bund futures never deviated too much from the underlying bonds (there's always some appetite to bring the two back in line).

So it's true that if the bund auction were to go badly, bund futures would suffer. However, this is certainly not happening at the moment. Whoever told you that German bund auctions are not going well? I daresay that if the US treasury can sell $11bn of 30y paper in a single auction seemingly without difficulty, the Germans shouldn't have an issue.