cost of debt

Another rate rise is likely on March 15, after a member of the MPC said it would have to raise rates to combat a “wave of inflation” coming from abroad. Last month, Poland raised its key refinancing rate 25bp, its first increase since the crisis.

“Through trade, an inflation wave is reaching even here. There is no other way. The MPC (Monetary Policy Council) will have to raise interest rates,” Jerzy Hausner said in an article coauthored with Miroslaw Gronicki, a former finance minister, reports Reuters. Read more

Do the markets know something we don’t?

S&P cut Ireland’s credit rating by one notch today, taking it to A- (still several notches above Moody’s and Fitch, at equivalent peggings of Baa1 or BBB+ respectively). Yet markets continue to relax, with the Irish ten-year cost of debt falling 20 basis points today, a fifth of one percent; at 5.45pm they were 8.8 per cent.

The cost of debt for Spain, Portugal, Italy, Belgium and Greece have all fallen, too. Greek yields are below 11 per cent for the first time since early November.

Gary Jenkins, head of fixed income for Evolution Securities, says: “It is interesting that while the story [that the EFSF mandate will be widened to allow debt buybacks] has been doing the rounds for three weeks now, yesterday was the first day since then that we have witnessed yields moves of such a magnitude, which does make one wonder if there has not been a leak ahead of the European leaders’ summit on Friday.” Read more

€2.3bn government bonds bought by the ECB settled last week, taking the emergency assistance back up to levels last seen during the Irish bail-out. Many of the bonds bought are likely to have been Portuguese, in particular during its debt auction on January 12 at which bond yields fell.

The value of bonds settling last week was 20 times that of the week before. Yields have been extremely volatile of late in struggling eurozone economies, including the “periphery” and Belgium. The cost of Greek and Portuguese debt is still falling following the latest interventions and market-calming discussions, but yields in Spain, Italy and Belgium are all rising once again.

Rumour has it that the ECB is buying Greek bonds again. Bloomberg news wire quotes a single person with knowledge of the transactions, who said purchases were mostly in maturities of five years.

The news comes as yields on 10-year Greek government debt surpass the record levels last seen in the May bail-out. Back then, yields spiked from about 8 per cent to more than 12 per cent, before falling equally sharply back following bail-out talks. This time, yields have grown slowly and steadily (see chart). These yields are what the market charges on reselling government debt: they are not the actual cost of debt to the government as at auction. In the absence of continuous auctions, however, they are a good proxy.

The cost of debt in the four “peripheral” countries – Greece, Portugal, Spain and Ireland – all reacted strangely to Ireland’s bail-out. The bail-out was intended to reassure markets, but yields did not fall as much as expected and since then have risen in all cases. Only in Spain are yields now tempering. 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 officialsdetermined 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

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

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

Portugal is the latest PIIGS government to suffer a sharp increase in its cost of debt. Like Ireland earlier in the week, Portugal has raised a significant amount of debt at auction at roughly one percentage point above the last auction.

Unlike Ireland, Portugal raised just three-quarters of its intended €1bn offering – not because of a lack of demand, but because Lisbon refused to accept the very high yields demanded by some investors. €400m of 2014 bonds sold at 4.695 per cent; €350m 2020 bonds sold at 6.242 per cent. Read more

Ireland has successfully raised €1.5bn on the markets – but at a price. €1bn 2018 bonds sold at an average yield of 6.023 per cent, nearly a 1 percentage point premium over their last offering in June.

€500m of 2014 bonds were also sold at 4.767 per cent, 1.1pp more than a similar offering in AugustRead more

Five-year Treasuries can be added to the growing list of US government debt being auctioned at record low yields. They join two- and three-year Treasuries in this unusual attribute.

The auction was agreed at a high yield of 1.374 per cent – a staggering 42bp drop from last month’s yield of 1.796 per cent. That’s a fall of 23 per cent. Read more

China continues to divest its dollar holdings of US debt, latest data show. Mainland China, Hong Kong and Taiwan all reduced their net holdings during June. Between them, at the peak they held $363bn in May 2009; as of June they hold less than half that amount, $170bn. Germany, France and the UK also divested during the month.

It’s a great time to sell for those with risk appetite. High demand has pushed yields to record lows (and prices, correspondingly, to highs) as widespread risk aversion makes US debt attractive to many. Read more

UK and French banks will be nursing losses this morning, after Irish bonds lost value yesterday. Rumours that that the ECB and Irish central bank were buying Irish bonds prompted us to look at banks’ sovereign debt holdings (the stress tests were useful, after all*).

RBS comes out with €1.1bn Irish debt in its trading books. It is followed by Credit Agricole (€0.76bn) and HSBC (€0.6bn). See chart, above. Read more

Freddie Mac 30-year mortgage rates just fell to a fresh all-time low of 4.54 per cent (see chart, right). But it’s not just homeowners who can borrow more cheaply than ever.

The US government’s cost of debt is at, or approaching, its lowest ever levels in the medium-term (<10 years). Yields on Treasury auctions have been falling gently and consistently as demand has risen.

Rising demand for US debt is usually taken as an indicator of risk aversion in the markets. But should US bonds be seen as a safe haven with so much strength in east Asia and Australasia, and such ‘unusual uncertainty’ facing the West?

Auction results of US government bonds are shown below from 2008, or as far back as the data go, for you to puzzle over: Read more

The US government can borrow from the market for five years at a rate 2.6 percentage points lower than for Portugal. Bond yields continue to fall for medium-term US debt (they fell yesterday for 2-year bonds too), even though very short-term debt rose (4-week treasuries reverse trend (Jun 22)).

The medium yield was 1.925 per cent, down from 2.07 per cent at the last auction on May 26. Tomorrow is the 7-year auction: on current trend, the rate will be lower than a month ago, when it was 2.75 per cent.

Portugal can still raise medium-term debt in the markets, but only at a price. Five-year bonds just auctioned at a weighted average yield of 4.657 per cent, IGCP figures show. This is a sharp increase from 3.701 per cent for the same maturity bonds auctioned last month (see chart). Demand for the issues were stable, with a bid-to-cover remaining at 1.8, and €943m bonds sold.

Had the yield been much higher, Portugal might have been as well off turning to the European Stability Fund, where 5 per cent is mooted as a likely charge. On that score, Portuguese banks are leading the way: funding from the ECB more than doubled last month to €36bn.

Well, they couldn’t go much lower. Yields have risen in the latest auction of 28-day treasuries, as the bid-to-cover fell to 3.7, the lowest since April 6. The flight to safety had pushed the cost of this short-term debt almost to zero at the last auction.

Three-year government bonds today sold at yields lower than March bonds, as demand picked up for assets perceived as safe. Falling yields have also been seen recently in the 1- , 5- and 7- year bonds. If the yield drop is temporary, the US stands to benefit in particular tomorrow and Thursday, when 10- and 30- year bonds are auctioned.

Not only is Greek and UK debt insurance justifiably pricey, it is adding to the cost of other sovereign debt insurance. This from a fascinating little paper from the Bank of Japan, released today.

Credit default swaps (CDS) offer a form of insurance to lenders against the risk of defaulting borrowers. The quantity of sovereign CDS has grown rapidly in the past year, increasing by 30.8 per cent year-on-year to February, compared with just 0.6 per cent for corporate CDS.

The chart above shows that Greek CDS prices are driven largely by idiosyncratic —i.e. Greek—factors, such as the fiscal deficit. The Portuguese chart, by contrast, is increasingly driven by “other” factors: these are defined as the “spillover effects of an idiosyncratic shock in other countries”. Here, I suspect, that means Greece. So where a chart has a lot of grey on it, that country is likely driving CDS prices for other sovereign debt, especially those that have a lot of light blue. And the main culprits (see other charts after jump): Greece, Japan and the UK. Read more

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. Read more

Europe’s cost of debt will rise substantially if Indonesia’s concern at holding euros as a reserve currency catches on. The US, Japan and the Middle East might benefit.

Indonesia has cancelled its first sale of euro debt, put off by Europe’s deficit-financing troubles, a finance ministry official told Bloomberg. “The euro bond is definitely not on our mind,” said Rahmat Waluyanto, director general of the debt management office at the finance ministry. “It’s out of our thoughts for the time being because of Greece, Spain, Italy and Portugal. The four countries are having problems and that is causing negative sentiment in the euro market.”

The euro is the world’s second most widely held reserve currency. Indonesia had planned to sell bonds in euros to diversify from a weakening US dollar. The government has now issued $2bn and is also looking at samurai and Islamic bonds for the rest of the year. Read more