Indicative Bond Yields by Country

Last week’s bond-stravaganza was very welcome and, for once, a relatively good news story. The effects of the return to the bond markets by Ireland can be seen below. In the figure below, country by country and relative one to the other, you’re looking at changes in indicative yields for 10 year bonds (Ireland actually has an 8 year bond, but let that pass) by European country. Green is bad on the horizontal, but good on the vertical, in terms of spread differential vs other countries (ht Eoin B for the clarification). Not much else to say really, except you should click on the image for a bigger and easier to read table.

By Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

30 replies on “Indicative Bond Yields by Country”

Poor Greece. They really destroyed it with that series of “bailouts” . Ireland is presumably secure in bond purgatory as long as the banks don’t start haemorrhaging again.

@ Stephen

“Green is good”.

Eh, you’ve got it on ‘spread’, not ‘spread change’. Green is bad, therefore, on the horizontal, but good on the vertical, in terms of spread differential vs other countries.

(1) How much are these bond issuances/swaps costing us compared with official funding? About €1bn over their lifetime
(2) What will the NTMA do with this funding that is costing us 6% per annum? Put it on deposit at 1%? Invest it is the the NPRF discretionary portfolio where 3% is a mega-return?
(3) Why did we issue now, and issue such a relatively large sum?

We validated the notional yields in the secondary market shown by Bloomberg. We demonstrated that there is €5bn of real money – mostly foreign apparently – out there willing to take a punt on this country for up to eight years at 6%, a rate which is unsustainable long term but in line with what Italy and Spain are today paying.

So there are positives in the development, but at what cost and why now and for so much. Answers look like negatives. So a relatively good or relatively bad development?

“Green is bad on the horizontal, but good on the vertical, in terms of spread differential vs other countries (ht Eoin B for the clarification)”

8 out of 12 on the horizontal are green, so bad?

or is the point being made that compared with the PIIGS, we performed well, though compared with the non-PIIGS we didn’t?

@Stephen Kinsella

Any ideas on where the latest funding will leave Ireland’s ‘free cash’ position at the end of 2012 and end 2014? The rainy day reserve!

@ Jagdip

re (1) should we stay in a Troika program forever? Decent chance we never issue long term debt below 3% (both for credit as well as nominal interest rate reasons, and we never issued that cheaply before either). Bond spreads have reacted positively to the operation, so should we not focus on how much cheaper the much larger future debt issuance is now?

re (2) What are Irish banks funding themselves at? 3%+ or so? Seems like a decent home for it. Again, there’s other options which no one on here seems to have the imagination to think of.

re (3) market re-entry is a long process. We dont just turn up in q3 2013 and issue ten year at uber low rates. Also, is there positive spillover for other parts of the economy from the market re-opening to the sovereign, in terms of corporate lending, FDI, up-grades to credit ratings from market access etc?


Should we stay in a Troika programme forever? No, but should we stay in a Troika programme until we get our deficit under 3%?

“there’s other options which no one on here seems to have the imagination to think of” Gwan there Eoin, amuse us!

“market re-entry is a long process. We dont just turn up in q3 2013 and issue ten year at uber low rates” From the phraseology used by some in the past week, you would think that bond markets were delicate flowers which could keel over and expire with a slight ethereal gust. Instead we have a deficit, a colossal debt and anaemic economic growth, and whether we get back into the markets in Q3 2013 at sustainable rates will be dependent on our performance under these three headings.

@ Jagdip

we have to fund 18bn for 2014. We’re not going to do that if we start in q3 2013. Thats why we came back now. We issue last week at 6%, we try and issue next time at 5.5%, then 5% the time after that etc. We then hopefully create an overall sustainable average cost of funding. We already have similar term funding on the books at rates around 6% which were issued in 2010, so its not like we broke some record last week. The fact of the matter is that last week we received confirmation that international investors are willing to invest in Irish government debt to a very large amount. It is now about chipping away at the yield that is required to issue it.

@ Joseph,

It will depend on the rate of drawdowns of the EU/IMF loans which may change after last week’s auction. If the rate isn’t changed we will have around €18 billion in the Exhequer Account at the end of this year. The plan is to raise another €6-7billion in market funding next year. If that is achieved the cash balance would stay at around €18 billion for the end of 2013. That would leave us in a relatively strong position heading in 2014.

At the end of June there was €14.5 billion in the Exchequer Account.


Thanks for that. Not bad. ~18 billion. Given the failure to resolve the euro crisis, it is an important strategic reserve. [Hopefully the Troika will not do what the banks do. The banks refer to it as a ‘cash sweep’, whereby any excess cash is handed over.]

This always confuses me:
Its like me topping up my current account by depositing from my credit card – isn’t it. And then keep doing it. Problem is that as long as the interest rate exceeds my growth in income I’m in a debt spiral. It means reduced expenditure and consumption for a long time to come.
Really it all depends on growth – if the growth isn’t there you’re on a hiding to nothing.

@ Eoin
I get your point about progressively lower interest rates but that’s not a given. Besides even if the rate is lower the cumulative rate really stacks up. I think that an interest rate of 2.5% is just about sustainable. Now, in order to achieve that we will need 4 auctions at 2% to offset this one at 6.8% (roughly).

So in answer to your first question – do we need to remain in the programme forever? My answer would be probably for as long as it can afford to keep us

@ Eureka

“I think that an interest rate of 2.5% is just about sustainable”

What is that based on? Pre-cris average funding rate was around 4.5%. Also, we have around 150bn in outstanding loans with rates already fixed on them (at around 4.25% id say), so this auction will have done almost nothing to the cumulative average funding rate.

@ Bond
“Pre-cris average funding rate was around 4.5%”
And look how that turned out…..

We have been around the blocks on this one before. Sustainable interest is growth with inflation factored in or something like that. That’s the only thing that makes sense

@ Eureka,

There is more to debt sustainability that just the average interest rate. The nominal growth rate and the primary budget balance are also involved. Do you have projections for those we can use?

With a 2.5% average interest rate and a primary balanced budget, a nominal growth rate of 2.5% would be enough to ensure debt sustainability (i.e. a non-increasing debt-to-GDP ratio).

In 2011, Ireland had a nominal GDP growth rate of 1.6%. The performance of the economy in 2011 was far from stellar.

Although we are still running a primary deficit (estimated to be 4% of GDP this year), under current projections there will be a small primary surplus in 2014 becoming a primary surplus of around 3% of GDP from 2015.

With nominal GDP growth of 4% (2% real + 2% inflation) and a primary surplus of 3% of GDP a debt equal to 120% of GDP would be sustainable at an average interest rate of 6.5%.

At an interest rate of 2.5% the debt ratio in this scenario would fall from 120% of GDP to 40% of GDP in 20 years. This is significantly better than ‘sustainable’. Are a primary surplus of 3% of GDP and a 4% nominal growth rate outlandish assumptions?

If the interest rate was at the pre-crisis rate of 4.5%, a 120% of GDP debt would decline to 75% of GDP in 20 years in the same scenario.

Italy’s debt rate was 120% of GDP in 1994 and they didn’t have an interest of 2.5% to keep it there.

@ Eureka

“And look how that turned out…..”

Debt servicing costs have never been a major issue for the Irish economy during this crisis. They may become a problem in the years ahead, but they’re a third or fourth level of symptoms or causes…

In this discussion it is implied that 6% without the troika is better than 3% with it. The troika is represented as some form of bondage that is detrimental to the welfare of the Irish citizenry .The very few reforms that have taken place because of the troika would never have been made without it. There is very few reason to hope that the Irish political system can act reasonably by its own volition .The troika could have been an agent of change ,maybe it will become one if there is a second bail-out (if it can be financed which looks more improbable).

@ OC

the Troika, a very broad mixture of central bankers, euro technocrats, and pragmatic economist types, is not accountable to the Irish people. A second program probably wont even include the somewhat more realistic IMF troops, it being an all-European affair at that point. Flawed as they may be, at least the Irish government occasionally has to go to the Irish electorate to see if they should be given another crack at leading the country.

@ Eureka

I know I’ve said this before, but if you don’t like the bond markets, don’t run deficits. It’s pretty simple.

Eureka – do you think there should be a vote on what you pay for a loaf of bread or pint of milk, and do you think it’d lead to a more efficient economy? Bond markets are accountable to those who give the money to the various entities – banks, insurance companies (general and life), pension funds and others (including hedge funds) – who invest in them, via deposits, policies or whatever. Prices are determined by supply and demand, and various differentials thereof. Not by a vote.

@ Eureka

also, given the principal redemptions on the maturing bonds, even if we had a zero deficit, we would need to be running surpluses of 5-10% of GDP if we are to avoid having to tap the bond market for rollovers. So bond markets are a fact of life for Ireland for the next 20 years minimum. As such, we will need to adhere to the conditions that they expect of us (which are generally not unfair either, ie responsible fiscal policy, some consistent GDP growth, no crazy financial sector collapses etc).

@ Bond
We’ve been here before. I think plan d is if you don’t need em you don’t pay em but am aware of the counter-arguments and not a position that I’m completely committed to.
Its plan d though – but we’re in for a pretty brutal few years!

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