Yields on Irish government bonds

It is not the first time but the estimated 10-year yield on Irish government bonds has again fallen below 3 per cent.  Here is a snap-shot of the yield curve this morning from this site.

The reasons for these historically low rates can be bounced around but it would be more useful if we could actually take advantage of them.  Ireland has an enormous public debt but the structure of it is such that very little is close to maturing and in need of rolling over.  In the EZ17 Ireland has a very low refinancing need (Latvia is excluded).

 

At the end of December the blended interest rate on the €22.5 billion of IMF loans that Ireland has accessed was 4.16 per cent.  These loans have a weighted average life of 7.3 years.  The above table gives an indicative rate of under 2 per cent for Irish government debt of equivalent maturity.  Two per cent of €22.5 billion is €450 million.

Replacing the official IMF loans with private funding seems attractive but the IMF loans cannot be repaid early without also triggering early repayment clauses in the €45 billion of EFSM, EFSF and bilateral loans from EU countries.  The details of these clauses are in this PQ answer.

Compared to the IMF loans, the EU loans have lower interest rates and much longer maturities.  Repaying them early would not be prudent given the uncertainties and possible unknowns that remain.  However, raising money now for loans which begin amortising next year anyway would only raise the funding target of the NTMA to the average EU levels (in GDP terms) as shown in the chart.  On the other hand it is not clear what impact such an action would have on interest rates but a significant impact would seem unlikely.

There are reasons on several sides for keeping the IMF as part of the ongoing Troika supervision of Ireland but are there €450 million worth of them?

Comments

comments

25 thoughts on “Yields on Irish government bonds”

  1. The Draghi put has been very good to Ireland.
    We should all pray to our lady of perpetual momentum.

    http://www.ft.com/cms/s/0/c8eab1fc-2205-11e3-9b55-00144feab7de.html

    “Market opinion tends to crowd around a consensus without much original analysis – nobody seems to be listening or thinking,” he says.
    Jim Reid, Deutsche Bank strategist, admitted in a note: “All of us are guilty of herd mentality”

    The States haven’t hit exit velocity yet either – what will happen if corporate profit growth fails to match valuations ?

  2. Good article. I hope the NTMA is seriously looking at this. Why not do a major refinancing now that conditions are so favourable?

    Portugal 10 year yields now below 4% by the way. Greece sub 7% and probably has further to fall if trends continue.

  3. Ireland going for a bond sale of up to 22 billion might sound a little audacious right now, particularly as Draghi seems seems to be a large part of the reason for current funding cost.
    IMHO, one has to wait until debt stops rising in order to activate major refinancing operations.

  4. I will just point out again that the pro note deal requires the unprinting schedule to be increased from the minimum to whatever rate of CBI held gilt sales will not threaten financial stability. Estimates of the “value” of the PN deal almost universally assumed the minimum sell off rate and nobody seemed to want to listen to the facts about the terms of the deal.

    I would be interested in arguments as to why the sales schedule cannot be speeded up, and I imagine several ECB governing council members would be too.

    What are they?

  5. @Grumpy

    What are they?

    http://www.irishtimes.com/debate/letters/morgan-kelly-and-economy-1.1734018
    That 80% of the debt issued by a country is still being purchased by non-residents, either because the locals have no money or don’t like the odds, should be good enough reason for the CBI to hold onto the PN bonds, whether they are ‘mandated’ by an agreement to sell them or not.
    Not to underestimate the benefit of holding them at (what?) .25%.
    Why do otherwise?

  6. @JR

    Can’t have it both ways – Mk’s mistaken assertion that the only real buyers were domestic banks on the carry and plenty of willing overseas buyers both indicating Irish spreads could widen significantly with more supply!

    Where is the evidence that quicker sales threaten financial stability?

    There is room for tax cuts, this thread is about how low gilt yields are and the likely Market reception of supply, and the finance minister has announced that AIB at least will not require any capital. Consistency?

  7. The situation with regard to what to do in terms of a strategy for the management of government debt must be judged IMHO against the general EA background.

    http://www.ft.com/intl/cms/s/0/21bcfac0-b661-11e3-b230-00144feabdc0.html?siteedition=intl#axzz2wd7kvOIA

    http://blogs.ft.com/the-a-list/2014/03/27/reasons-to-favour-eurozone-quantitative-easing/#axzz2xByU9sdx

    Factoring in the situation in the Ukraine, the most obvious conclusion would appear to be a policy of “steady as she goes”.

  8. fyi
    Ukrainian Bonds ring a few bells:

    Tim Ash, from Standard Bank, said: “Ukraine has been the ultimate moral hazard play and it’s cavalier to expect taxpayers to cover this.” Mr Ash said it has been obvious since 2011 that Ukraine was heading for the rocks, yet funds continued to snap up its bonds, betting that the country was “too big and geopolitically important to fail” and would always be bailed out in the end by Russia or the West.

    Franklin Templeton, the global asset group, held $7.3bn of Ukrainian bonds at the end of 2013. Mark Mobius, the group’s chief, said last month: “Our belief is that Ukraine is in somewhat of a sweet spot… We believe they are going to keep friendly/good relations with Russia.”

    Ashoka Mody, a former IMF negotiator, said the country screams out for debt relief, given external debt of 75pc of GDP and a collapse in exports. “It is truly staggering if they don’t push through debt restructuring, and the question is why not. I would go for very deep relief.”

    http://www.telegraph.co.uk/finance/financialcrisis/10728149/Windfall-for-hedge-funds-and-Russian-banks-as-IMF-rescues-Ukraine.html

    On the Hibernian 3% – the markets believe that the annexation of Hibernia by the systems of Money & Corporater Power is complete. If the poor serfs can get 3% I’d wade in; and I’d give it all to said citizen-serfs.

  9. Arseny Yatseniuk, Ukraine’s premier, said his country was “on the edge of economic and financial bankruptcy”, yet vowed to comply with demands for drastic austerity – including a 50pc rise in fuel prices – even if this proved a “kamikaze” mission.’

    Wonder who elected this guy? The boy form the westh has competition (what else?) for the best boy in class

    p.s. Blind Biddy is having a quiet evening back in Kharkov.

  10. @Grumpy
    Don’t quite follow your argument. Not to worry. I assume you, or the Minister, is jesting re both tax cuts and AIB being ‘rock solid’.
    [Consistency? Political consistency is an oxymoron.]

    I tend to agree with @DOCM on the need for some caution on this.

    @Seamus Coffey/ @ALL

    re: The IMF blended interest of approx 4.16% as outlined in Minister’s Noonan’s Dail reply, linked to above.

    How does that interest rate (4.16%) compare to the IMF SDR interest rate calculation note linked below. I am unable to make sense of the IMF note, but it seems that the Irish rate should be a lot lower based on the current short term Euribor/UK/US/Japanese.
    http://www.imf.org/external/np/fin/data/sdr_ir.aspx

    What drives the IMF rate up to 4.16%, or is it that we do not benefit from the global rate reductions of recent years?

  11. Grumpy,
    Quicker sales of the FRN portfolio raise debt service costs assuming the bonds are refinanced at a market rate …no. By definition, impinges on financial stability.
    I would pose another question, if the ECB implements QE to tackle deflation following Mad Jens Damascus moment, why would they be sold at all?

  12. We have little indeed in 14 or 15. But we have the best part of 40b in 16-18. thats not that far away.
    We need to go back to dull ole sinking funds.We need to stop the interest only and start repaying.

  13. Prof Lucey,
    To “repay” the debt would presumably require a move to budget surplus? Which taxes would you increase, which spending progs would be cut and are PS wages untouchable?

  14. @Tull

    I’m not sure the ECB regard expenditure on interest payments on faster sales as a threat to financial stability, if you thought it might send spreads much wider then they might, but does anybody really think that likely?

    I am assuming QE will be pro rats with ECB capital so the Irish sideshould be seeking buyins of gilts with the hawks seeking to have the unsold but could have been ICB held gilts regarded as a pre-allocation of QE to Ireland.

  15. Grumpy,
    If I understand you correctly, the bulk of any ECB QE would then be into core markets & Italy (?). Logically, this would drive peripheral & credit spreads wider. This seems counter intuitive. Should the ECB not buy risk assets ranging from peripherals to peripheral mortgages and credit.

  16. something from a while ago about defaulting on bonds

    http://www.ft.com/cms/s/0/11903b18-f603-11e2-a55d-00144feabdc0.html#ixzz2xXquvFB3

    “The decision to treat these bondholders as unsecured in the messy bankruptcy proceedings, despite the fact that these general obligation bonds were backed by the full faith and credit of the Detroit government, has been controversial.
    The decision undermines long-held assumptions that GO bonds will be put ahead of other liabilities, such as employee pension and healthcare promises, investors and rating agencies say. In turn, that could lead to lower assessments of the bonds’ creditworthiness and higher funding costs, at least in Michigan if Detroit’s bonds are found to be unsecured under state law.
    Mr Snyder laughed off such concerns as suggestions that he would “destroy the modern world”.
    Such jockeying is an inevitable part of the bankruptcy process, the two men said. “Some of this is bad theatre. This is off-Broadway stuff,” Mr Orr said. Creditors and other claimants, including city employees’ unions, “have to do this for their own constituencies”.

    There are likely to be more Detroit-style defaults within the EU that probably won’t threaten the entire structure of the currency now that the markets are mainlining plámás.

  17. @seafoid

    Former blog stalwart pops up in Japan

    Oh dear.

    Tol said the IPCC emphasized the risks of climate change far more than the opportunities to adapt. A Reuters count shows the final draft has 139 mentions of “risk” and 8 of “opportunity”.

    Unprecedented drought conditions in many countries could be seen as more “good drying weather” Tol said while also noting that the increased frequency and intensity of flooding in Europe was a boon for the rubber boot and inflatable boat industries.

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