Wow. I take my hat off to the combined drafting skills of the US Treasury and the Chinese for this inspired bit of calculated dullness, of almost North Korean calibre. That’s an object lesson in damping down speculation about deals over an end to the renminbi peg, for one news cycle at least. In a cricketing culture, that would be called playing with a dead bat. For the US and China, it’s smothering the ember of news with the wettest of wet blankets.
What a day for debt. Long-term debt is costing the US government more than at any time in recent history. The latest auction on 30-year US Treasuries secured the highest yields since August 2007 – 4.77 per cent. Demand was slightly lower than the last auction, with $35bn bids for $13bn of debt. Record levels of government debt make rising rates a worry.
Yesterday, yields on 10-year bonds neared their Lehman’s highs, although they have not yet exceeded them. Unlike the 30-year auction, demand was extremely high for the 10-year bonds. This would normally act to dampen yields – so rates would have been higher still had there been more normal levels of demand.
Jean-Claude Trichet’s press conference today was eagerly awaited, what with the Greek crisis escalating and the European Central Bank having recently executed U-turns over International Monetary Fund involvement in a rescue package and on its collateral rules. So, how did the ECB president fare?
The answer, I think, depends on your point of view. If you think the ECB should take more of a political role as a guardian of Europe’s monetary union, there was lot there. Mr Trichet told eurozone governments to “live up to their responsibilities” (as one analyst said to me: “Can you imagine Ben Bernanke saying that to President Obama?”) and suggested how interest rates could be set on emergency loans to Greece.
But to a lot of watchers, the sessions must have appeared particularly scrappy. The ECB president admitted himself that
The election spat over national insurance – an income and payroll tax – is becoming more absurd by the day. Even though I argued that the business case for avoiding the national insurance rise was so weak it had to be an April fool, Gordon Brown has done himself no favours by also suggesting British business leaders are idiots. In the usual election claim and counter-claim, there are three important principles I keep close to heart.
1. The person who writes a tax cheque is rarely the person who ultimately pays the tax. The Financial Times pays the vast majority of my income tax by withholding it from my salary, but income tax is levied on me, not the FT. The same is true for national insurance, whether it is the bit formally levied on the FT on my behalf or the bit formally levied on me. As economists would say: “the formal incidence of a tax is not the same as its effective incidence”. Here is one such economist, Ray Barrell from the National Institute for Economic and Social Research, writing a note to one of my colleagues.
The suggestion that a rise in NICs is a tax on jobs is not economically coherent, although it might look plausible. The incidence of a tax on wages does not influence its effects. Both are a direct tax on wages, but are collected differently, and have limited or no direct effects on employment. … It is the sort of thing we do in first year undergraduate courses.
For more information on tax incidence and why national insurance cannot be described as a tax on jobs
It’s unclear what is making investors sell Greek debt. It may be the German stance. Yesterday, it seemed Germany wanted Greece to pay market rates for their debt, and now there are mumblings of Bundesbank opposition to the current bail-out plan.
Whatever the explanation, markets view Icelandic debt — think: Icesave woes — as a safer bet than Greek: the cost of insuring Greek sovereign 5-year debt is above its Icelandic equivalent for the second day. So it costs about €460k to insure €10m Greek debt, compared with €410k for Iceland (see chart).
The Bundesbank has distanced itself from a report this morning that it opposed Europe’s fall-back plan for rescuing Greece. The Frankfurter Rundschau newspaper quoted a Bundesbank “internal paper” arguing that the plan would not stop German money flowing to Athens and threatened to undermine eurozone fiscal rules.
If that really were the Bundesbank’s view, it would be another blow for those hoping for united and effective eurozone support for Greece. But a Bundesbank spokesman said the paper was “not authorised” and was just the “first reaction” of an official. The paper had not been presented to the Bundesbank’s board, let alone been agreed. “A process of forming an opinion has not yet taken place,” it said.
Today’s industrial production figures for February are strong, highlighting the receding chance of a double-dip recession being announced for the first quarter just before the 6 May election. Even less likely is the chance the Monetary Policy Committee will do anything at their monthly meeting today, thrusting themselves into the heart of the election debate.
And to stop the MPC’s deliberations in May having an effect on the election, the Bank of England has already confirmed it will postpone the start of deliberations for the scheduled 6 May MPC meeting for 48 hours with the outcome reported on Monday 10 May. The date of the May inflation report remains unaltered.
The US government is paying more on its debt than at any time since mid-2009, and, prior to that, since the fall of Lehman Brothers. And demand for 10-year debt at the latest auction was at a high – almost double the levels seen during Lehman’s.
In yesterday’s 10-year treasury auction, $78bn debt was demanded, of which $21bn was accepted. The ratio of the two – the bid-to-cover ratio, an indicator of demand – was the highest since before Lehman’s.