Investors eye European bond auctions
Government bond auctions used to be routine, not to say dull, affairs - watched over only by market specialists.
Not any more.
Ever since November, when mighty Germany saw a partial failure of one its own 10-year bond auctions, these regular sales of sovereign bills and bonds have become a very public measure of a country's ability to remain solvent.
The last few days have seen a modest respite on the debt markets, with unexpectedly strong demand for German and British five- and 10-year bonds.
But attention is now shifting to the more stressed Southern European countries that are struggling to service their loans.
The next rounds of Spanish and Italian auctions will be nail-biting affairs for everyone involved.
They will be 2012's biggest tests of investors' remaining appetite to finance the debt built up by financially-troubled eurozone states.
High borrowing costs
The exact processes vary greatly from one country to another, but centres like the UK Debt Management Office are working overtime almost everywhere.
In the next two weeks alone, the outcome of some 60 separate sovereign auctions will be closely monitored by wary investors.
To stay liquid, and ultimately solvent, sovereign states have no option but to keep rolling over their bonds at auction.
If they cannot afford to renew national loans as they reach the end of their term, well the only alternative is seeking a bailout and probably defaulting as well.
Each potential investor in a bond issue will say what quantity they will buy and the price they are prepared to pay.
The issuer will try to close the auction so as to pay the lowest possible price.
If the rates - or the yield - the would-be investor wants to charge are simply too high, the sovereign issuer may not be able to borrow all the money it wants.
With this in mind, the markets are focusing most on the Spanish and Italian auctions.
"Borrowing costs on 10-year Italian bonds have risen aggressively above a troubling level of 7%," observes David Watts is a strategist for CreditSights in the City of London.
"This is starting to get unsustainable and means the country may be forced to borrow from the EU. People are also looking at Germany and France as the crisis spreads to the core countries."
Today's topsy-turvy market conditions also produce some unexpected outcomes.
Most recently, some German bonds have been exhibiting what are termed "negative yields".
In practical terms, this means some investors are actually paying the German government interest to keep their money safe because they believe it will at least be returned safely at the end of the term.
Until recently, typical rates paid at auction depended most on which country was issuing the debt.
But CreditSights say that it is now the short-dated loans that are often priced most competitively because lenders worry that the euro might not survive and they would end up being repaid in a weaker new currency.
One important factor in the success of an auction is a country's overall credit standing.
When the US saw its country rating downgraded, the impact on bond sales was modest.
Private and Chinese investors alike still had to store their wealth somewhere, and felt the US government was the best place to do that.
By contrast, the downgrade of a single country in Europe could cause mayhem, Mr Watts explains.
"If France was downgraded, investors from outside the country would start to avoid it and choose to park their savings in Germany," he says.
"As things stand in Greece and Italy, it's just the domestic banking system which is buying its own countries' bonds.
"They are really trying to maintain the price levels of the bills being sold by the government, and therefore the level of the bills they already hold at the moment."
So it follows that when investors start to shun a country, it will have a wide impact on the future demand for those countries bonds at auction and force troubled sovereign states to turn to the European Central Bank.
Peter Hahn, a member of the finance faculty at Cass Business School in London, warns that demand for government bonds will also fall as European banks start to shrink their activities to match their now reduced capital bases.
"This is an ugly ramification for politicians," he says, "because the banks will take fewer risks, they will put less money into their economies and will buy fewer government bonds.
"And that's not pretty."
What is crystal clear is that the eurozone's survival in its present form depends on successful bond auctions, where commercial lenders are prepared to fund countries at prices their treasuries can afford to pay.