Inversion: Two-Year Bond Rate Moves Above Ten-Year

As I write, the two-year Irish bond yield has risen from 9.3% to above 10% and is now higher than the ten-year bond yield. I suspect this may be a reaction to yesterday’s meeting of Euro area finance ministers and the prospect that Ireland will not get a reduction in its interest rate. But I’d be interested in hearing if people can point to other reasons.

44 replies on “Inversion: Two-Year Bond Rate Moves Above Ten-Year”


The 2 Year Ireland-Bund spread has just hit an all time record wide of 835 bps, following unconfirmed rumors that either Ireland or Allied Irish Bank has missed a coupon payment.

Reuters mentions the rumour, but dismissively:

“(But) there’s no bond due to be paid because the last bond due to be paid was on March 6 and the next one is April 18 so I don’t see why they’re saying something like that.”

The rumour is b*llox. The bond in question doesn’t have a coupon on it til next Tuesday.

Most of the annual yield is a premium for the annual probability of a default/restructuring times the lost capital value if this occurs. If there is a default/restructuring it is likely to be sooner (say, within the next two years) rather than later. Presumably the two year and ten year bonds would get roughly similar losses given default. If default/restructuring is avoided, then eventually the ten-year might get a big capital gain after the storm has passed. The two-year will just be redeemed at par. So perhaps the two year should have a higher yield?

Isn’t the traditional reason for yield inversion the perception that interest rates will rise in the short term and fall in longer term so by 2020 rates on Irish bonds will be lower than in 2013? That ignores default by the way.

Isn’t the real reason for the increase in yields generally – looks like we could break 10% on 10s today – is that the Portugese government may well fall tomorrow as it is unlikely that a left-wing coalition government is going to approve a fourth round of austerity measures. Their PM Jose Socrates has said that he will not even attend the crucial Euro summit on 24/25th if the austerity budget is defeated tomorrow.

And with Portugal then seeking a bailout, we will be, to use David McWilliams’ novel castle defences analogy, at the citadel of Spain.

From Bloomberg-
“Investors in countries with debt deemed “sustainable” will be encouraged to hold bonds to maturity, according to an ESM term sheet. A country with “unsustainable” debt will “engage in active negotiations in good faith with its creditors to secure their direct involvement.”

I think the market is pricing us in the latter category and assuming the two year will be hit regardless of the start date of ESM in 2013.

The prices are consistent (amongst other possibilities) with an expected re-scheduling (as distinct from re-structuring) where the shorts get differentially punished, eg through a common maturity extension or equivalent.

I posted the attached on the thread dealing with the comments of Trichet. It might be part of the explanation.

Another element might be the comments by Pat Rabbite (acting Minister for Finance?) reported in today’s IT that the issue of sharing the pain with bondholders was still on the table and that the Irish programme “had failed”.

P.S. As regards the introduction of teenagers into the debate, it seems that I must confess to being the culprit. However, in the interests of accuracy, I reproduce what I actually wrote.

“In the eyes of the rest of Europe, and not just those of Trichet, Ireland is a querulous, peevish teenager claiming that life is sooo unfair and is threatening to leave home. It simply has not yet sunk home that the parents could view this prospect with equanimity”.

The view is not attributed to me or, indeed, to other bloggers who might share some of my opinions. In fact, I am convinced that the Irish people have more sense than those who seek to speak on their behalf. The Irish correction is the biggest in the world because its bust is the biggest. I do not dispute that assistance is needed but I have the gravest doubts about the manner in which the new government is going about the task of getting it. This seems also to be the view of those that have to provide it.

In the time available, it does not seem possible to come up with an alternative approach. Maybe the scene will be different if Portugal joins us sitting on the EFSF branch and this provides both the excuse and the impetus to amend the interest level.

But even if this happens, it will not resolve Ireland’s difficulties. However, it could provide an opportunity to come up with some coherent position stated by one minister which concedes the one thing that the country’s creditors are looking for viz. a firm re-statement of intent on the part of the new government that it will stick to the IMF/EU programme.

Or could be rumours or leaks of the likely bank losses to be announced in the next few days

Could the markets be looking at it this way :
Default in the next few months = taxpayers problem
Default after 2012 = bondholders problem
Are they trying (using all their guises) to engineer defaults sooner rather than later?

Political instability. FG and Labour being akin to oil and water there was an expectation that they would successfully emulsify. It now appears that each substance is frozen in place resulting in policy paralysis. Jiggery pokery, toing and froing will continue for a year or two after which the gov’t will collapse. The risk premium is highest for the period 18 months to three years. The market is telling us that we will come to our collective senses in the period beyond five years. It is much to my relief that we are not being given a life sentence. This does not mean that payments on the 10 year paper will not be missed, it means there is a fair prospect of the principal being repaid. The two year paper principal is right now a riskier prospect.


The 2 Year Ireland-Bund spread has just hit an all time record wide of 835 bps, following unconfirmed rumors that either Ireland or Allied Irish Bank has missed a coupon payment.

JTO again:

Since denied by AIB:

I think it will eventually be found that the deliberate planting of this hoax rumour was not unrelated to this morning’s announcements that (a) UK inflation rose to 5.5% in February (b) UK government borrowing hit an all-time record in February. As anyone who was brought up north of the artificial border will know, UK governments are world champions in black propaganda. Every time there is bad news on the UK economic front, of a type that, in a rational world, would lead to an increase in interest rates on UK government bonds, a rumour gets circulated that is intended to exaggerate the risk of lending to some other country, making the UK seem like a safe haven in comparison. I noted this a few times on this site last year and predicted further instances to come. So, frankly, when the UK inflation and government borrowing figures for February were published this morning, I expected something like this.

The tactic has been remarkably successful in recent years and enabled the UK to borrow money on the markets at an interest rate far below their inflation rate. The large number of posters who, assuming they put their money where their mouths are, and invested their money in UK government bonds in 2007 are now sitting on a minus 10 per cent real return (UK interest rate less UK inflation) plus a 15 per cent currency depreciation into the bargain. My commiserations to them. I pray that Morgan Kelly is one of them. In contrast, having switched my modest savings in 2007 from UK to Irish assets, I am raking it in, getting not just a ginormous real rate of return (Irish interest rate less Irish inflation) but a 15 per cent currency appreciation into the bargain.

“Speaking to RTÉ a short time ago, Ben Dunne said the Moriarty Tribunal never acted upon a medical report which said he was unbalanced and unwell’ during the 1990s.Mr Dunne said the report stated he was using ‘mind altering substances’ which affected his memory and behaviour. Mr Dunne said the tribunal never spoke to his medical team or psychiatrist.”

The Ben Dunne defence – I do not recollect – sure wasn’t I on the drugs!


@ JtO

I know you are one of the good guys but I have a few technicals to pick you up on. Inflation & Depreciation are not additive. If you intend to spend in the original currency then inflation is your problem, if you intend to spend in another currency then depreciation is your problem, but not both.

Also if you invested in Irish assets in 2007, that cannot be good. You may be now earning 10% p.a. but that is only because you have suffered 30% asset falls.

I agree with your substantive point though that the Brits would really like to see us down and especially to see the Euro down. What a pity so many of our academics feed this schadenfraude by blacking Ireland on such blogs as FT Alphaville.


I may be delusional but I’m also getting very rich.

The £X thousand sterling (I won’t reveal how much exactly in case some ladies on the site are after my money, but it was quite considerable) that I transferred from my Belfast bank in 2007 and invested south of the border has appreciated in value by something in the region of 35% (in sterling terms), due to both the whopping interest rates and the large currency appreciation.

How much have your investments increased in that time, Christy? Don’t be shy to tell us.

As I posted on here last year, it would be a good idea if all economists and economic commentators in Ireland revealed where they have put their money. I assume that all the ones predicting that Ireland is going bankrupt have invested their money in London and received an annual MINUS 3-4% real interest rate and a 15% currency depreciation. My sincerest commiserations to them.

@Brian woods II

I am not a financial analyst or first-hand investor. I don’t go around purchasing property or shares or bonds. I wouldn’t even know how to. My Belfast bank and (loyalist) financial advisor handle any money I have. I merely turn up to see my financial advisor every six months or so. Last time I was there, the money I told them (against their advice) to invest south of the border in 2007 was up around 35% (in sterling terms). I assume that they invest it in bonds and so forth, rather than in property in Carrick-On-Shannon.

Regarding where it is spent, well the whole point is that it hasn’t been spent yet. Its in the bank accumulating at a ferocious rate. And, the border is easily crossed when it comes to spending decisions, assuming the border still exists when I get round to spending it.

But, the substantive point is the comparison with what it is worth now, compared to what it would be worth now (in sterling terms) if I had lent it to Her Majesty in 2007 instead.


We can start with you as regards investment disclosure. What exactly did you invest in South of the border against the wishes of your advisers? If it had been invested in Irish sovereign bonds, you would have a very healthy loss of way over 35% of your capital, depending on the the length of the maturity of the bond.

I do not live in Ireland and all my investments are in US oil and gas production companies.


Well played!

I intervene in these exchanges simply to remark that Philip Lane in his full interview with RTE for the “default” programme also dealt briefly with the contradiction between free movement of capital and the constraints of a single currency; the “trilemma” that is well-known even to non-economists, thanks to Paul Krugman and other economists who do not believe that it necessary to be an economist to understand what they are saying.

In essence the theory states – if I have grasped it correctly, which is open to doubt – that you can have any two of the three essential options for government of (i) an independent monetary policy (ii) a fixed exchange rate (iii) free movement of capital; but not all three at any one time.

The designers of the euro seemed to have overlooked this fact and, in particular, the fact that the free movement of capital is one of the basic four freedoms underpinning the EU.

To this trilemma can be added that identified by Wolfgang Munchau (i) no default (ii) no bailout and (iii) no exit.

The £X thousand sterling (I won’t reveal how much exactly in case some ladies on the site are after my money, but it was quite considerable)

Not only are you delusional but also a sexist MCP.

@ JtO

It is a minor technical point but money is in the end of the day what it buys. Money left in sterling will buy less in the UK because of inflation and it will by less in France because of depreciation, but there is not a double whammy.

What bank you in? Best I can get is 3.5%

JTO: I assume that they invest it in bonds and so forth, rather than in property in Carrick-On-Shannon.

I hope for your sake they don’t invest it in fast women and slow horses, but if they do you have nobody to blame but yourself. You really should take a bit more interest in your portfolio than that.

… it would be a good idea if all economists and economic commentators in Ireland revealed where they have put their money.

I’m pretty sure Karl Whelan wouldn’t class me as an economist since I don’t have a PhD, but FWIW: 40% Dublin property, 15% equities (mostly UK and US), 15% Irish gov’t bonds, 5% near-cash (fairly evenly divided between sterling, dollars and euros) and most of the rest is in a defined-contribution pension scheme over which I have no control. I have no idea what you think you can deduce from that, but your reasoning is always highly entertaining, so go for it.

I’d love to know what people think will happen next. I’m not great at predictions but here’s what I think:
Scenario A
1: The corporation tax thing will be fudged and
2: We will dodge default this time but
3: Default is inevitable before 2013 and the longer we leave it the worse it will be or
Scenario B
1: We won’t accept the EFSF deal in which case we negotiate default with the IMF
2: Public sector pay cut by 40% – a really hard 2 years and then back on track
I dunno….


Serfs are delighted that you are doing well John.

Serfs, of course, are broke. In fact a few are surprised that they are broke_er and down -€28,272 each at the mo in socialized banking debts …. once the many figure this out ….? Maybe hitting the Magic_10 on the 2-yr will do the trick.

p.s. Blind Biddy ‘s not lookin at the mo. You’re safe ’nuff dere (-; She’s over in Bahrain chattin with a Shia Sheik …. way out of your league!


The sheikhs in Bahrain are all Sunni. That is the problem innit. The muckers are Shia.

If they make real concessions we hang on…for further concessions.

If they don’t we hang on…hoping for real concessions.

Mr Bond Market might force a resolution. But panics don’t last forever.
Or we could outline a plan to close the deficit instantly, endorse it in the Dail and see what happens. Then if they make real concessions we hang on…

The debt will eventually be renegotiated. Ireland will not return to the stone age. If we suffer enough they…will let us stay in the eurozone. Perhaps that is the real threat our establishment worry about. Imagine the embarassment of being slung out.

One thing is clear: Irish people are vastly more concerned about the potential destabilising effect of an Irish default on the eurozone than Merkel, Sarkozy and Trichet are. By co-opting the IMF they believe they have neutered us. They probably have.

Austerity, emigration and unemployment either way.

Let’s not delude ourselves though that our rulers were selflessly sacrificing (us) to save Europe – if not the planet – at the time of the bank guarantee or are doing so again now.

@Brian Woods II

What bank you in? Best I can get is 3.5%

JTO again:

Ulster Bank.

Your figure is probably about right, although I don’t involve myself in details of what the bank does with my money. Does anybody? The most I have ever done is tick a box from a list: ‘high-risk’, ‘medium-risk’, ‘low-risk’ etc. Most of the gain has been from the 20% appreciation of the Euro v Sterling. Add on the interest rate cumulatively over 4 years, and it comes to around 35%. The bottom line is: £1,000 sterling put in a bank in Belfast in mid-2007, and invested by the bank in UK bonds, would now be worth negligibly more than £1,000 sterling today because of the very low interest rates – the same £1,000 sterling transferred from a bank in Belfast to a bank in Dublin in mid-2007, and invested by the Dublin bank in Irish bonds, would now be worth in the region of £1,350 sterling because of both the Euro appreciation and the higher interest rates.

@ JtO

But John, you lost all your money right here last week.

“I have just bet my entire life savings on the Paddy Power website that this blueprint will not receive one favourable comment on this site. I trust that, when I return from the Saint Patrick’s Night celebrations at Saint Kiernan’s GFC, I shall not have been let down by anyone on the site acting out of character.”

“The document is a useful synthesis of an extensive number of issues where Ireland can directly impact or better prepare the economy to take advantage of emerging trends.” Michael Hennigan.

Pay up, fair’s fair.

Where to from here. The private sector overall is doing quite well, albeit property and related activities are in the doldrums. Our Gov’t will sit uneasy in their seats until the ECB topples them. At that point there will be great wailing and gnashing of teeth as they start to do what should have been done in 2007. Variations on “the devil made us do it” will be heard loud and clear from the Dail. The private sector will continue to make progress in spite of dragging the dead weight of a dysfunctional Gov’t. I have a lot of sympathy for Enda he seems to be a decent man. If he was not surrounded by the product of Irish elections who for four generations now have presided over a moribund economy 75% of the time, he might have a chance. We get what we vote for unfortunately.


I bought my house in Jan 2005. I recently got an estate agent to look at it for the purpose of selling. He advised me that I would be extremely lucky to get two thirds of what I paid for it, if I could sell it at all. This sounds to me like 50% from peak. I know what another house 4 doors down went for and it would be approx 50% from peak. My house is located in an area less affected than most other areas due to its proximity to town and a good village. That’s the anecdotal evidence for you.

….but if the Euro falls where does that leave you?
It is possible that that could happen….

Today’s FT puts it down to the offocial announcemnt bu the EU of ESM incorporating burden sharing. FT says the jump in spreads was particularly marked for those bonds which maturing in 3 years time after handover from EFSF (no burden sharing) to ESM (burden sharing).


but if the Euro falls where does that leave you?
It is possible that that could happen….

JTO again:

Anything can happen.

If that happened, I would lose out. Doesn’t worry me in the least.

However, inflation in the UK is much higher than in the Eurozone, and much higher still than in Ireland. And the UK money printing presses have been working flat out since 2007. So, the balance of probability is that the £sterling will continue to fall v the euro over the medium-term and long-term, although obviously these exchange rates fluctuate violently in the short-term.

The important point is that I have been completely up front about where my money is, so you can judge whether I have a particular interest in any particular outcome. I will lose out if Ireland defaults or leaves the euro and devalues. You may, if you wish (I certainly don’t mind), say that my opposition to both these is based on the fact that I would lose out if either occurred. However, others should be equally upfront. Given the nonsense they write about Ireland going bust or the economy melting down, I would guess that there must be lots of media commentators, and posters on here, who have lots of lolly stashed away in London. That is their right. I’m simply saying that, when they advocate default and/or devaluation, we should be told if they stand to make a huge windfall profit precisely because they have lots of lolly stashed away in London.

Just looking at the news and looks like Portugal will also be joining the fund.
If more countries need bailing out Germans will be very unhappy.

‘David O’Donnell Says:
March 23rd, 2011 at 10:11 pm

& who is going to bail-out the German banks?’

assuming that you are a taxpayer here, then the answer is:

me, you, our kids and theirs as well.

Unless, Trichet turns on the printing presses there is no other way.

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