$1,000bn: that’s the estimated fiscal stimulus if current US tax deal discussions come to fruition. Economists have upped their 2011 growth forecasts by 50-70bp on the news; traders have brought forward their estimates of a fed funds raise as yields rose significantly. The policy couldn’t be more different from yesterday’s austerity measures in Ireland.
US citizens at both ends of the pay spectrum would be better off under the deal, paying less tax and therefore having more to spend. Under the current deal – which has some way to go before it is passed – the 2 per cent employee payroll tax cut would be kept, saving some families about $2,000 and costing about $200bn. The main, $800bn part of the deal would extend Bush-era tax cuts across all income groups – including the very wealthy, who are more likely to save the additional income.
Robin writes: Read more
The European Central Bank seems almost as divided as politicians over E-bonds, or common eurozone bonds. Jürgen Stark, executive board member, voiced opposition in an interview with Süddeutsche Zeitung. “Every country must take responsibility for their own debts,” he said. Similarly, Nout Wellink, the Netherlands’ central bank governor, said in Amsterdam that such burden-sharing would weaken the system.
But ECB policymakers who take, let’s say, a less-German view of the world, have been more sympathetic. Jean-Claude Trichet, president, last week told the European Parliament such ideas should not be ruled out. Lorenzo Bini Smaghi, another executive board member, has just told CNBC that “it’s useful to think about these issues”.
One worry at the ECB’s Frankfurt headquarters might be that Germany’s government and its central bankers are fuelling financial market concerns about an apparent lack of political will behind the European project and the continent’s 12-year-old monetary union. Read more
To me, it was pretty clear that Jean-Claude Trichet, European Central Bank president, was leaving all options open when he gave evidence to the European Parliament late on Tuesday. That can only mean the chances of a significant scaling-up of the ECB’s government bond purchases have increased. It may not happen, but at least the possibility would appear to be on the table. Here are my answers to some of the obvious questions:
Why? The ECB could decide that at least parts of the bond markets have become dysfunctional, pricing in risks of default that do not reflect the fundamentals of countries such as Spain. The original purpose of its Securities Markets Programme, launched in May, was to restore the proper functioning of the monetary transmission mechanism, which was a way of saying it would correct dysfunctional markets. An escalation of the bond purchases could also be justified on monetary policy grounds – if there were a risk of asset price deflation.
When? Read more
No surprise: the ECB stepped up its bond purchases last week as Irish yields soared in the resale market, and Greece and Portugal issued new debt at inflated yields. Quite how high the yields would have been in all three cases were it not for ECB intervention, we can’t tell. But the ECB bought €1,073m bonds in its security market programme, the highest since 2 July, barring one episode in October (see chart).
More PIGS* woes today, as the Greek budget deficit worsened. In line with last week’s rumours, the deficit is now projected to reach 9.4 per cent of GDP, missing the 7.8 per cent target by some margin. In Portugal, the finance minister spoke on the possibility of a bail-out – judging the risk to be “high” for external, not domestic, reasons. Contagion was spreading like ‘wildfire’, he said, and no eurozone member could feel safe.
Dublin is still resisting aid, while the debate is shifting to deposit outflows from Ireland’s largest banks. Read more
Dublin is resisting pressure to accept aid. Discussions have been taking place over the weekend, with European officials making the case for aid, and Irish officials “determined to get out of the financial difficulties [they] are in.”
Little has changed in the fundamentals of the Irish economy. Market pressures were prompted by discussions of the eurozone rescue fund a few weeks ago, in which it seemed bondholders would lose money in the case of default. Debt prices fell, and yields soared. This tempered considerably on Friday, after finance ministers from Europe’s five largest economies suggested the loss on bonds would not be retrospective and the entire thing might be voluntary. Read more
Irish bond yields have dropped back as European officials have dramatically scaled back the impact of a sovereign default on bondholders.
Bondholders had been selling off peripheral eurozone debt – particularly Irish – since Brussels announced they might need to accept a loss – or haircut – in the value of their holdings should a default occur. This effectively reduced the future value of bonds held. The precise nature of who would lose what has remained unclear, as the sell-off sent bond prices down and yields above 9 per cent yesterday for Irish 10-year debt.
Now finance ministers appear to have backtracked, saying Read more
Details are out for the Fed’s bond purchase plan for the rest of the year. $105bn, split into $75bn as part of the $600bn stimulus, and $30bn of ongoing reinvestment of principal payments.
The bond purchase plan is spread across 2012-2040 maturities, though it is front loaded with far more bonds to be bought with 2013-2020 maturities (as the chart shows). Almost all of the purchases will be purchases of regular Treasuries, with just (just!) $2-4bn of TIPS on the menu.
Full details in table below the jump: Read more
The key level of 8 per cent has been rapidly passed today by rising Irish ten-year bond yields. London clearing house LCH.Clearnet has now moved to protect itself from any possible restructure, by making it more expensive to trade Irish debt.
LCH.Clearnet, the world’s second largest fixed income clearing house, said an additional 15 per cent margin requirement would be charged on investors’ net exposure to Irish bonds because of the increasing risk of a sovereign default. It’s another blow, following news that some SWFs were divesting Irish and Portuguese debt. The ECB is apparently buying Irish debt yet again.
Tension rose today following a Portuguese debt auction. Lisbon did sell €686m 10-year bonds and €556m 6-year bonds, less than the guideline range, which was €750-1250m in both cases. (Selling less than the guideline amount has been a feature of Portuguese debt auctions since July.)
Yields, however, were punitive. Lisbon will pay 6.81 per cent Read more
The Greek cost of debt has just risen quarter of a point: Greece will repay the markets €300m over six months at 4.82 per cent, up from 4.54 per cent at the last auction in October. The rise takes the Greek cost of debt back up to highs in 2008 (see red spots on chart).
Greece is testing the market, auctioning short-term debt roughly monthly instead of quarterly (see blue bars on chart). Six month and three month bills are still being regularly offered, but there have been no 1, 5 or 10-year bonds since April and no other maturities for even longer.
The timing of Greek debt auctions has been pretty good, to date, raising funds in periods of relative market calm. The secondary market has been wild at times – above 10 per cent – but the maximum agreed yield at auction was a trifling 5.09 per cent in 2008.
This may lend hope to Ireland, Read more
If the Irish government wanted to issue new ten-year debt this instant, they would have to agree to repay at about 7.8 per cent, a record and a very sharp increase on several preceding sharp increases. And this in spite of bond purchases by the ECB.
If investors wanted to insure themselves against the possibility of default on €10m five-year Irish bonds, they would have to pay €608,000. That’s higher than the cost of insuring against Argentinian default, apparently. Read more
It is good news that the New York Fed is engaged in a campaign to get key staffers to finally think about asset prices.The Alan Greenspan mantra that the market is always right has – mercifully – been cast aside… Still, there is one sphere where the central banks are unlikely to sound the alarm.
In both Japan and the US, sovereign debt trades at ever lower yields as a result of purchases of government bonds by the central banks themselves… [T]he largest part of the buying comes from the central banks themselves. With massive purchases of Treasuries, the distinction between fiscal policy and monetary policy is becoming blurred. Central banks become ever more complicit in politics… Read more
It’s acronym war. Sovereign wealth funds in Norway and Russia are backing away from Irish and Spanish debt, sending bond prices down and yields up – in some cases to record levels. Rumour has it the ECB is trying to help by buying peripheral eurozone debt, which is slowing but not halting rising yields.
So the big question is: will the rescue fund be needed? The ECB’s largest weekly bond purchase was about $23bn, after all, and these SWFs between them command $663bn. What proportion of that is invested in Spain and Ireland, we can’t be sure, but the (very short) list of Russia’s remaining investable countries suggests the Russian holdings in each country were significant.
Take Ireland. Irish 10-year bond yields reached record highs of 7.53 per cent today. Not a lot has changed in the country itself. But (perhaps ill-timed) discussions on the shape of a permanent rescue fund in the EU have changed a great deal. First, the possibility of a debt restructure is alive and well; a permanent fund is needed, after all. Second, there is talk that bondholders will have to bear some of the loss in the case of a restructure. Default no longer means delay: it might mean a significant loss.
The point at which the Eurozone Financial Stability Fund would offer its services, and the rate at which it would lend are unknown. A mooted rate is 8 per cent, and Ireland seems perilously close. Two things here. Read more
It looks likely the ECB has been buying Irish bonds this week as bond prices have tumbled in peripheral eurozone countries; Business Week quotes three traders confirming the central bank intervention at 2019 and 2025 maturities.
The premium investors charge to hold 10-year Irish bonds over their German equivalents – the yield spread – has risen above 500bp this morning, and credit-default spreads rose to 5.3 percentage points, a record according to Markit.
Greece’s cost of debt is also rising, not helped by the deputy PM reportedly saying: “Debts exist to be restructured.” Indeed many think the fear of debt restructure – aggravated by recent discussions of the eurozone bail-out fund, the EFSF – is what’s driving the markets, rather than fundamental deterioration in the domestic situation. Gary Jenkins, head of Fixed Income at Evolution Securities, said: Read more
Using inflation-linked bonds to forecast inflation? Beware – new research suggests they are only decent predictors in the short-term. Over long horizons, the relationship is actually negative:
We showed that the break-even inflation is informative about future inflation over horizons of 3, 6, 24 and 30 months. For the 3- and 6-month horizons, besides being informative, break-even inflation is an unbiased estimator as well. However, over the horizons of 24 and 30 months, the relationship between the break-even and future inflations is negative. On the other hand, for the horizons of 12 and 18 months, breakeven inflation has almost no power to explain future inflation. Read more
Sheila Bair, chair of the Federal Deposit Insurance Corporation, gained much respect and notoriety in Washington for her warnings about - and handling of - the subprime mortgage crisis.
And so it is somewhat unnerving to see her offer remarks today warning about the potential for a bond bubble that could do significant damage to the US financial system if banks do not prepare for higher interest rates down the road. Especially in a context of possible additional quantitative easing by the Federal Reserve, which could easily push treasury yields even lower than they are now.
“The consensus is that this low-rate environment will persist for some time into the future,” said Ms Bair. “But what will happen when interest rates inevitably rise, and how disruptive will that process be? “ Read more
The ECB didn’t buy any bonds last week, following an abstemious week the week before. Under the Securities Market Programme, the ECB has been supporting peripheral eurozone members by buying government securities since sovereign debt troubles in Greece in May.
Recent Irish and Portuguese sovereign debt woes prompted a resurgence in this (highly unusual) ECB activity, but the overall trend is clearly downwards (no doubt to Axel Weber’s delight). Markets have been calmer since the IMF-EU bail-out of Greece and the creation of the EFSF. Pity Mr Weber wants to phase that out, too.
Taiwan just expanded its armoury against hot money: its financial regulator has apparently accepted a proposal from the central bank to accept only US dollars as cash collateral for bond borrowing. The move is intended to bar the use of bond borrowing as a means of speculating on Taiwan’s currency. There is no official confirmation (in English, at least) on the Financial Supervisory Commission or central bank websites but the news is widely reported from local sources. While addressing the Legislative Yuan’s Finance Committee, FSC chairman Chen Yuh-chang also voiced reservations about a more direct ‘hot money’ tax, saying it could dramatically affect domestic equities.
Falling bond yields are aggravating the underfunding of defined benefit pensions, and further quantitative easing will make the problem worse still. This from Jacob Funk Kirkegaard at the Peterson Institute, with a piece entitled: Central banks should also be wary what they buy.
Accounting rules are leading to stricter funding requirements in the US, argues Mr Kirkegaard. This in turn forces pension plan sponsors to increase their contributions to underfunded schemes. Read more
It must be painful viewing for Ireland and Portugal. Whether it’s risk aversion or a straight out bond bubble, yields are still falling on US treasuries – meaning the US government can borrow ever more cheaply.
One-year bonds (or to be exact, 52-week bills) have risen slightly to 0.265 per cent, from September’s record low of 0.26 per cent. But the other maturities are at or approaching record lows. Read more
Government bonds bought last week by the European Central Bank totalled €1,384m, a tenfold increase on last week’s €134m purchase.
As Ralph and David will shortly report on ft.com, purchases of Irish bonds were largely behind the increase, according to traders:
Ireland’s escalating banking crisis forced the ECB to ramp-up significantly its government bond buying programme last week, when purchases hit almost €1.4bn. Some of the ECB purchases reported on Monday may have been deals struck in the previous week but only settled last week.