cost of debt

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