NTMA Bond Issue: Yields Up Sharply

Amid all the coverage of the banking reports and the other ongoing political stories, very little coverage has been devoted to the fact that the bond markets are again turning less and less positive about Irish sovereign debt.

Today’s NTMA bond auction (press release here) saw it borrowing €1.5 billion, equally split between a bond maturing in 2016 and a bond maturing in 2018. The NTMA press release stresses the fact that the auctions had bids of three times the amount offered. However, look at the yields. As the RTE website points out “The average yield on the 2016 bond rose to 4.521% from 3.663% at the last comparable auction in April and the 2018 bond had a yield of 5.088% from 4.55% last August.”

On the secondary market, the yield on ten year bonds has now given up most of the large decline that occurred after the May 9 announcement of the EU stabilisation fund. In fact, the FT are reporting that, as of yesterday, the spread over bunds stood at 281 basis points, relative to 319 basis points on Friday May 7, and yields are up another 20 or so basis points so far today.

What’s odd, of course, as Paul Krugman has been pointing out is that these developments have not stopped the constant references, both here and abroad, to how well regarded Ireland is by participants in international financial markets. 

To be fair, I think there are a few cross-currents here that go beyond the essential point that Krugman is trying to make. I would echo Krugman’s concerns about the effects of imposing fiscal austerity too soon. The budget deficit for the Eurozone as a whole is projected to be 6.6 percent of GDP this year, so to my mind the need for generalised fiscal contraction today is overstated in light of the weakness of the Euro area economy. However, the bond market’s attitude to Ireland’s position is such that the Irish government has little choice but to adopt an austerity program, a point that Krugman has conceded before.

Furthermore, I’m sure that financial market participants are impressed by the fiscal retrenchment obtained so far. But, at the end of the day, the bond yields give us their judgment on the sustainability of our situation and it’s a thumbs down. The high yields being imposed on us reflect the scale of the initial hole we dug for ourselves as well as policies that maximized the cost to the state of the banking crisis.

46 thoughts on “NTMA Bond Issue: Yields Up Sharply”

  1. It may not be as bad as that. It appears that Moody’s downgrade of Greece last night means that investment managers are dumping Greek sovereigns and sucking their losses. This has pushed all the troubled eurozone bond yields higher.

    The NTMA may be in the position where they recognise that today’s auction should have been post-poned for calmer times, but doing so would look like something ‘bad’ is happening. This is in itself ‘bad’ as it means that, despite the war-chest, the NTMA doesn’t really have flexibility on auction dates – come hell or high water, the announced date has to be met.

    It also bodes poorly for the rollover, rollover in September, as all eyes will be down for the bingo… oops, key-of-the-door? We’ve already go lots, thanks.

  2. “ery little coverage has been devoted to the fact that the bond markets are again turning less and less positive about Irish sovereign debt. ”

    Overall I think the coverage has been misleading. There is a myth that Irish bond spread declined following the last budget.

    Ireland didn’t get better, its just that Greece got a lot worse.

  3. The NTMA has now covered 80% of total 2010 funding needs, by far the highest proportion of any country in Europe, and including cash balances they’re fully funded for the year. But no, lets not dwell on such a meaningless piece of information that would (a) explain why maybe they have funded slightly more expensively and (b) why we have a lot less to worry about in terms of a funding freeze in the months ahead.

  4. That’s right Eoin. Let’s not focus on the actual news, on the things that are actually happening. Let’s focus on something we already knew.

    Question Eoin: If we are shut out of the international bond markets, can we just carry on spending our pile of cash under the assumption that they’ll just open again? No need to bring in the EU or IMF? No, we’ll be fine. Things will be just grand. Sure don’t we have the world’s most admired government to look after things.

  5. Perhaps instead of comparing Ireland with Spain, as Krugman does, a comparison between Ireland and Greece is more appropriate.

    According to the DG-ECFIN AMECO database Spain’s debt was 53% of GDP in 2009 and is expected to be 72.5% in 2011. For Ireland they have 64% and 87% respectively. More importantly the deficit in Spain (11.2% in 2009 projected to go down to 8.8% in 2011) is smaller than the Irish one (14.3% going down to 12% by 2011). Even the Greek deficit is reported to be smaller at 13.6% for 2009 (but of course their debt levels are massive).

    The markets will be looking at these numbers and they won’t be wearing a green shirt (or green tinted glasses). We are still able to borrow in the market, Greece can not. If we don’t keep up the austerity programme we won’t be able to do that for much longer!

  6. The bond markets are passing judgement on Europe and especially the peripheral markets. Spain’s funding costs jumped in their auction for T-bills this morning as well. Italy has also underperformed. There are market factors at play as well as judgements on fundamentals. Libor is still climbing and overnight deposits at the ECB reached a record last night. There is still risk aversion and a liquidity squeeze to be seen in the market. Of course Ireland is in a crap place but nothing has changed with regard to the public finances.

  7. @Gavin S
    “nothing has changed with regard to the public finances.”
    And this may be the problem. Even if it is largely window dressing, the government needs to be continually banging on about how we’re on track, or ahead of it, how the banking costs to the economy will be minimised, what the next budget and the one after that and the one after that will look like, how Bord Snip and the Commission for Taxation reports are going to be implemented.

    In short, the current plan is insufficiently detailed to be reassuring.

  8. Im pretty sure an 80% funding rate is an actual event that is actually happening. Or did i imagine it? We’ve raised 2.7bn in the last 6 days alone, just saying we should recognise these facts.

  9. @yoganmahew – “the government needs to be continually banging on about how we’re on track……” – yes and they also need to counter any misinformation (intended or otherwise) that is out there about Ireland e.g. the inclusion of IFSC debt when, as the German government found out with DEPFA, most of that is probably not a liability to Ireland.

  10. @Eoin
    Yeah, grand and all, but some billions of it are in short-term debt that will have to be rolled either back on the tick or into long-term debt before year end.

  11. @ Eoin

    That we’re largely prefunded for the year is, as I say, not news. That we’re paying huge yields a month after “Shock and Awe” is.

  12. @ YM

    700mn Jan 2011
    500mn Mar 2011
    750mn Apr 2016
    750mn Oct 2018

    Im not saying everything is all rosey with the Irish funding landscape, im just providing a bit of a contra argument to the rather gloomy outlook posed in this thread. At this moment in time, given how much the Irish state has raised in the last week at a time when the Eurozone sovereign markets are still barely functioning for ANYONE bar Germany, we appear to be funding ourselves without too much panic or stress, albeit at levels we would obviously like to reign back in over the rest of the year. For all this talk about the markets giving us the thumbs down, they don’t seem all that worried about continuing to fund us going forward.

    Btw, anyone notice how much the comments have dried up since Bruton went for the head shot over the weekend? And they say this site is not politicised…

  13. Seems like you’re the only one bringing up politics, Eoin. I can’t see what this thread or anything else that matters here has to do with Richard Bruton.

  14. Eoin, just so I get this right: “sovereign markets are still barely functioning for ANYONE bar Germany, we appear to be funding ourselves without too much panic or stress, albeit at levels we would obviously like to reign back in over the rest of the year.”

    Is your argument that we’re in better shape than anyone other than Germany? If so, what’s with the yields?

  15. I presume Eoin is making the point that the yields at todays auction reflect general market conditions rather than a shift in the market view on the Irish eocnomy per se. I think it is a fair point.

  16. 10 year yields as of close of play according to Bloomberg

    Greece 9.08%
    Ireland 5.48%
    Portugal 5.44%
    Spain 4.73%
    Italy 4.05%

  17. @Eoin
    The last data I can see for outstanding short-term debt is:
    http://www.ntma.ie/NationalDebt/compInstruments.php
    as at 31 March 2010
    has 14.7 bn in short-term debt comprising t-bills, commercial paper and some odds and sods.

    A further 10 bn is retail debt. Prize bonds, An Post and some more odd sods.

    The cash on hand is 27.1 bn

    The longest the short-term debt as of 31 March 2010 can be secured for is a year; I think it unlikely that all of it is secured for that length of time. The 10 bn of retail debt is largely repayable on demand, but it is also unlikely to shift, so perhaps we can exclude that for the moment?

    I reckon, including the banks, some 30 bn will be required this year, so it appears the NTMA are counting their cash on hand as secured, even though they have to refinance some of it over the course of the year.

    This is borrowing short to spend. Not to lend long, just to spend. Realistically speaking, the requirement for long-term debt issuance is large. The end June figures will be interesting…

  18. @KW

    I think eoin is saying that the reason there are fewer comments on these threads is that the people who usually comment are busy doing polictical stuff / gossiping about RB. In other words lots of the comments on the site are from “hacks”.

  19. Pre-funding has costs. If assets and liabilities are matched as to term, the costs are the intermediation margin. If mis-matched, with a sharply upward-sloping curve, liquid assets funded by term borrowing can be expensive. Karl makes the point that DMOs face something of a game of chicken: if liquid, they can defer an auction, but may spook the market. If you cannot defer auctions, or can only do it once, there must be a limit on the optimal amount of pre-funding, even without recourse to the EMF. The NTMA’s figure looks high, but it is hard to know without details on cost.

  20. @Eoin:
    “Btw, anyone notice how much the comments have dried up since Bruton went for the head shot over the weekend?”

    Omit “since … shot”: it was the weekend, partly sunny, with beer, barbie and boat beckoning.

    bjg

  21. @Karl:
    “Sure don’t we have the world’s most admired government to look after things.”

    And the world’s most admired opposition available as a backup ….

    Oops: that might be interpreted as a political comment.

    bjg

  22. What a joke – 80% pre-funded? Don’t the governemnt guaranteed banks have 72bn euros falling due by October according to the same government? You can’t guarantee liabilities of banks and not be responsible for their funding. We know budget revenues are well below target, employment fell by 30,000 in 1Q giving little hope those budget revenues rise soon, and the government has guaranteed far more bank debt than it can ever afford really to back. When faced with risk of insolvency, bond yields naturally rise, and there is a real risk of a bank run at some stage. Congratulations on that “80% pre-funding”!

  23. @ Karl

    “Eoin, just so I get this right…”

    Eh, no, i have no idea how you could read my post as that. What im saying is that we are adequately funding ourselves at a time of massive market disfunction, and that this should be viewed as a good thing just as much as the yields on our debt should be viewed as a worrying thing.

    Christy is also pretty much on the money with where im coming from as well.

  24. @ All,

    I remember a while back, somewhere along the line, many commentators at Irish Economy blog came to the conclusion, that the lines between state debt and private banking debt became blurred. If we want to involve deputy Richard Bruton in the discussion, it should be noted, this was one of Richard Bruton’s main arguments around the time of super Tuesday. We have muddied the waters altogether in Ireland, and it is impossible anymore to figure out what the markets are really pricing into their rate of discount. Super Tuesday, was that day we all remember when the scale of re-capitalisation for Anglo, INBS, AIB, BOI and EBS were announced. It’s funny now though, how little we can recall of Super Tuesday and what actually happened. Which does underline again, the importance of what Karl Whelan is actually doing. Which is to record events as they occured in a timeline sequence. Too many discussions get bogged down, as politics and economics are mixed together, because our memories as human beings is so oddly short. I guess, as someone said to me a while back, if our brains did not discard a lot of stuff reguarly, then they would simply explode. I don’t get enough time anymore to check up on discussions at Irish Economy blog, but if someone could remind me what ‘shock and awe’ refers to, I would be greatful. I see one of Karl’s comments above employs the term. BOH.

  25. @ Eoin,

    Eh, no, i have no idea how you could read my post as that. What im saying is that we are adequately funding ourselves at a time of massive market disfunction, and that this should be viewed as a good thing just as much as the yields on our debt should be viewed as a worrying thing.

    It is quite simple Eoin, I think. Karl is attempting to wrestle with that argument that Richard Bruton put forward back at the time of Super Tuesday. That we don’t have a clear separating line for display purposes to the international markets anymore, between state debts and private debts. I do take the point you are making, about widespread market disfuctionality. But even if the markets were operating at an optimal level of functionality – then, the issue that Karl is referring to, would still be there. I need to employ an example. Say for instance, you were going to purchase a house. The advertisement says, a 2 bed semi, with garage – and oh, the neighbour next store who works for the state doesn’t mind of your kids play around in his back yard, which is much larger and has real goal posts installed in it, and a basket ball ring too. That is, it is like an advertisement to buy a 2 bed semi w/ garage, and a right-of-way onto someone else’s property. How would the market react to such an advertisement if an auctioneer printed it up on their window? You see my point? Although, at other times, we purposefully try to manipulate how the market views a certain product. For instance, when I am buying a home today, or renting, I am suppose to see the Building Energy Rating, to enable me to judge how much fuel it is going to guzzle. BOH.

  26. @ Eoin,

    Although, at other times, we purposefully try to manipulate how the market views a certain product. For instance, when I am buying a home today, or renting, I am suppose to see the Building Energy Rating, to enable me to judge how much fuel it is going to guzzle.

    To elaborate on that analogy slightly, if I may. What the government policy with regard to the banking crisis has done, is printed the following advertisement. If the 2 bed semi-d w/ garage, sucks through too much oil next winter, the neighbour next door will not mind if you extract some more from his tank. Think about that for a second. If you are a bondholder of an Irish bank, you are going wow! What a neat offer, yes sir, I’ll have me some of that. But on the other hand, if the neighbours house is up for sale the add would say: Large house in good condition, with large rear garden, used sometimes by neighbour’s kids, and he is also welcome to supplies from your oil tank if he runs out. In other words, that right-of-way clause muddies the waters. But what it actually does, it makes the one house really attractive to purchase, if you like free loading. The other house becomes less attractive. That is how bond investors are looking at the state debt at the moment. BOH.

  27. The budget deficit is still far too large and must be brought under control, NOW, so that we can have a budget surplus, needed to pay the higher interest rates on debt we have borrowed funding the national and FG approved, hobby of pumping good money into bad banks and land developments.

  28. Eoin
    You are a short term thinker. Brian O’Hanlon has surely made it clear to you that we need to keep going to borrow more and that each time, it is more costly.

    Think in the longer term? Your market updates are useful, but you appear to be unable to learn from the posters on this site.

  29. Another sound and sober assessment from Karl I think. We are only scratching the surface of our economic and political problem at present.
    Fiscal sustainability is just the most obvious and pressing aspect.

    The FDI sector matters, but it’s the state of our ‘native economy’ which is the core problem. The distortions, which arose from historical political decisions made in Britain, have never been rectified. Colonialism and centre/periphery relations are not side isssues. The world economy has been, and contoiues to be shaped by such processes, which are in many respects Darwinian.

    A preoccupation with land and property, and an acceptance of emigration as a safety valve against change, has characterised our ‘independent’ state. That’s not to decry all the hard and excellent work done in many fields here. It’s just a pity that so much of it has been undervalued and so much talent has to leave.

    Our Noughties were not as modern as we like to imagine. The iPods and the capuccinos and BeBo served to obscure an unchanging Irish reality. ‘Safe’ investments in property, ‘safe’ careers in the public sector, and ‘safe’ political manoeuvring. Mediocristan.

    The paradox is that it our cautious orientation, as typified by our banks unwillingness to lend to SMEs, which has brought us into this crisis. Lack of enterprise in private and public life, and a lack of proper boundaries between private and public sectors. Fiefdoms and vested interests at all levels.

    We are now desperately trying to prop up property values and public sector employment, for fear of further deflation and/or political disorder. Like the climber who is stuck on a ledge, we can’t see how to get up or down without falling off. An uncomfortable place.

    Given that the fiscal crisis is continuing to deeper in the Eurozone, and that the global recovery is stuttering, it’s hard to see where rescue, in the form of economic growth, or state bailout, is going to come from.

  30. @ Brian
    I believe ’shock and awe’ refers to the ECBs entry in to the bond market.

    @ Eoin
    The fact our bond yields are above 5% again after the ‘shock and awe’ would suggest that market sentiment is really bad and/or that europe are continuing to pull back on the bond buying excerise.

    Either one leaving us very exposed to whatever way the wind is blowing on any given day.

  31. FYI – June 16 (Bloomberg) — Ireland’s National Treasury Management Agency will hire Rossa White, chief economist at Davy, the country’s biggest securities firm. White will be chief economist at the NTMA, a spokesman for the agency said in an e-mail.

  32. @ Karl

    has the NTMA ever had a dedicated front-of-house economist before? Trying to figure out what his role will be, ie purely internal forecasting, or something more public and affecting budget/banking issues going forward?

  33. It is true that Ireland can currently access debt markets. However the yields in Irish auctions currently are too expensive and surely would result in unavoidable debt/deflation spiral anyways? Not possible to grow out of debt at these yield levels with widesread European austerity measures and stumbling US growth?

    Interesting to note – Now more expensive for Ireland & Spain to fund itself outside of the €750bn European Financial Stability Facility. Perhaps time for IMF!!!

  34. Irish 10-year yields were over 6% in mid-March 2009, more than 150 basis points higher than a year earlier in March 2008…they are now around 5.5%…

  35. Of course the yields are up. One interpretation; the markets see the ‘austerity’ measures of Ireland as being a mere fop and genuflection to those buying bonds this does not make our bonds more valuable. The more we bow the more they realise that there is a good reason to bow.

    Yields rise and the market knows these austerity measures will require even more austerity. Our economy is shrinking and of course the current deficit has not decreased at all. Our policies are a vicious circle, deflating the safety and liquidity of our bonds while putting more and more pressure on the lender of last resort. For Ireland, the lender of last resort, is now our only lender. That shows that Lenihans policies have failed.
    Anyone who has read what Michael Sommers has had to say will realise that Mr. Lenihan was captured by the department from day one.

    We have disingenuously spun the willingness for some of the Irish people to be made to to wear sackcloth. Simultaneously, the people responsible for the mess are being lined up for plum jobs in NAMA and Anglo, which our CB governor is telling us is working very well. Confidence may be the invisible currency of banks but this stuff coming from Mr. Honohan is eroding my confidence in both him and the policies being pursued. There must be a good reason for him to burn up his own ‘capital’ by defending these bodies. Selling off properties for cash at extraordinary low prices, even before the second tranche of loans has been bought totally contradicts the supposed LTEV strategy of NAMA, which was supposed to be the core idea of NAMA, and which we were blitzed with. Anyone doing any research on the Irish economy will see what is afoot. They have to dump these properties on to the depressed market because of the magnitude of non-performing loans. Not a good portend of what is coming down the line. Also, has anyone noticed the credit flowing?

  36. @ All,

    The Sunday Business Post featured an article by Richard Curran, entitled The tax breaks that broke us, which I got around to reading properly this afternoon. I had assumed in the past the concern over tax breaks to those people earning rental incomes, was a bit overdone by the press and media. But after reading Richard Curran’s article, there is much substance in what he has to say. The reason I am skeptical of the media’s coverage of ‘tax breaks’, is the reporting is often sloppy. It is a lazy way out for reporters who really do not want to delve too deeply into issues affecting the Irish economy, and resort to a bit of FF/Cowen bashing. That is why I think Curran’s article is a very worthwhile contribution to debate. He has taken the time to study the Regling Watson report and consider the issues in depth and dimension. Of course, Curran’s article The tax breaks that broke us, does fit in neatly with some of my examples above. The oil tank that the state refills for the next door neighbour, if/when the cold winter comes and oil prices shoot up. Curran concentrates on the idea of a transfer of wealth. But I prefer to concentrate on the idea, that potential risks are being transferred to the state’s citizens from private enterprise. In fairness, if one has to quantify it, Curran is correct in his assertion, the tax breaks did break us, to the tune of billions. What is harder to quantify is risk. I.e. In my example above, the transfer of risk is (a) the possibility of a very cold winter and, (b) the possibility in the rise of price of fuel. I am sure there is a ‘risk transfer’ as well as a ‘wealth transfer’ at work, if one were to analyse the property tax breaks fully. Something which Curran’s article could not have elaborated on, in the thousand or so words in a newspaper. BOH.

    The tax benefit to a group of people of around €2.2 billion was a major transfer of wealth and it could have been used to make investments of several times that amount. Property developer beneficiaries of tax incentives could have used the extra cash from their incentives to borrow tens of billions of euro.

    http://www.sbpost.ie/newsfeatures/the-tax-breaks-that-broke-us-49859.html

  37. @ All,

    An Irish government website some of you might like to take a goo at some time. There has been much complaint and consternation amongst the construction industry in Ireland in recent months about the GCCC public procurement contracts introduced by the dept. of Finance, to keep in line with EU guidance & legislation for member states. One of the discussions focusses around the transfer of risk from the state as the employer in the works contract to the private company, the contractor to build the project. Many say that this approach is excessive and doesn’t suit many projects where too many unknowns exist. But the point I was making in relation to Richard Curran’s article, is a useful one in the context of discussion about public procurement contracts. Because it highlights the fact that in some cases the state knows exactly how to stiffen up terms of engagement to its own advantage. While in Richard Curran’s article, he consumes a thousand words to explain how the state had absorbed gigantic amounts of expense and risk, especially between the years 2005 and 2006. It would be really interesting, if someone here, more knowledgeable than myself, in public procurement and tax breaks, were able to make an intelligent comment. I would like to read it. BOH.

    http://www.constructionprocurement.gov.ie/

  38. It would have been cheaper to allow the theft of 1,000,000,000 Euro a year by our crony mercantilists and their hangers on.

    That is the cost of a failure to regulate by the Gardai. They do not enforce the laws of corruption that exist because they wear the green jersey.

    Do we wish to allow the incompetence and greed of our leaders, in opposition and government, to continue while they sing “it is not only shit that rolls downhill, the crumbs from our table also decorate your dismal lives!” ?

    I look forward to capital teaching the ignorant that greed is expensive. Interst rates have two bounds: zero and infinity. Double figures are not out of the question in respect of existing and future debt. Will you peasants learn from this? I doubt it.

  39. @ Pat

    Do you look forward to riots, muggings and breakdown of public services ?
    That’s how the failures of governance have traditinally been ‘learned’. I certainly don’t.
    There are no peasants here, but there are a lot people who have been wearing optimisitc blinkers. It’s painful to to take them off but it’s downright dangerous not to.

  40. @BOH

    I cant clearly see the effect of tax breaks.

    They encouraged extra building – i get that

    They were used as tax shelters and to the extent that this building would have happened anyway were a tax expenditure – i think i sorta get that

    But surely this extra building increased the supply of housing and thereby put downward pressure on house prices – was this extra supply and associated price effect not their rasion d’etre.

  41. @ Christy,

    Good points Christy. We need to remind ourselves more often about the difference in terms of housing supply/demand balancing of the market, between Leitrim and Dublin. Leitrim has limited demand, or some small flurry of demand in highly speculative periods in time. But Leitrim managed to get itself stuck with real over supply, which might in turn be linked back to some kind of tax avoidance scheme-ing. I know developers who purchased land and sought planning for practically new towns in the BMW area (border mid-west, I think it means). They happened to be commercial landlords who were taking enormous rents from premises in other parts of the country. They honed in on the BMW region and outbid everyone else to acquire the landbanks beside towns. Clearly, in that case there was some relationship. At one point I worked for a group that inserted themselves in the middle there, and purchased the said landbanks beside BMW towns, to gain planning permission and pass that product onto someone who needed the taxbreak. I mean, planning permission for half a town, stuck onto a existing one. It was a tricky challenge, because if you can imagine it, you could half planning for multiple phases on sites, which straddled town and county council boundaries on the edges of BMW towns. The county council would re-zone right on the boundary with the town council, and in a number of years, the town boundary would be extended outwards. So the administration of the application went through the roof. This is why I think we have far too many planning authorities in Ireland, and we need to condense it.

    But getting back to the Dublin market, it was completely different. You can a lot of pent up demand, relatively little supply and a big problem with price inflation as a result. In fact, it your point about increasing supply to a sustainable level, within the Dublin market is a valid point. Because it prevents a situation occuring, where you have a steep price increase at the start of a boom, which sets the scene for much of what follows afterwards. In other words, you have a really high/artificial floor set in the market to begin the boom, and it gets worse from there. We are probably not planning for enough re-juvenation in Dublin at the moment, to set the current market floor at a low enough level. Builders in the Dublin area know this, and are in no real rush to provide supply of finished units at the right price, and establish a solid bottom to the Dublin market. Tax shelters probably played a large part in Leitrim and less so in Dublin. In Dublin, the price inflation was related to simple under-supply, in the initial high growth phases of the Irish economy in 1990s. That is what Peter Bacon’s report in 2000 dealt with, to furnish McCreevy with advice, then as minister for finance. BOH.

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