I have heard the concept of a "failed" government bond auction in many places. But I am confused - how could it ever fail? Surely the bids could just be low and the bonds sell at a value lower than their face value. Are there actually bond auctions where some bonds *literally* go unsold?
What Went Wrong with Economics
Of course, bonds, just like anything else could remain unsold. If the buyers' bids are below the lowest price (reserve price, if you will) at which the seller is prepared to sell, no transaction would occur. A "failed" auction results from bad communication between buyers and sellers -- a bad job done by the brokers (intermediaries) who had given bad information to each party about other side's expectations.
Keep in mind that a bond is just like any other contract. It is a promise to pay or some sort of liabiity on the end of the issuer/borrower and an asset to the buyer. And just like any other security or product or service, the buyer of the product or service wants to pay the least amount possible while issue wants to pay the greatest amount possible. (No we introduce yield, which is the amount the buyer receives in total, principal + interest adjusted for time. Otherwise it would not make sense to use price as it is depending on interest rate and bond issuers will issue a variety of interest rates and terms.)
So on to the auction. If the bond issuer is judged to not be able to pay or if competitors are offering better yields the bond issuer must increase the yields to get people to buy the bonds, ie they must increase interest rates. Keep in mind that the yield rises inversely with price. So as the price goes to zero the yield goes to infinity. Before the price goes to zero the issuer just refuses to sell the bonds and considers the auction a failure.