government bonds

Claire Jones

The European Central Bank has insisted that its bond buying will have no impact on inflation.  But, given that the securities market programme now looks set to increase significantly in size, will it manage to keep its bond purchases ‘sterile’?

Since the programme began last May, the ECB maintained that an amount equal to the money it uses to buy the bonds would be withdrawn through the central bank paying lenders to hold more cash on deposit at the central bank.

Bar a few instances in which a spike in interbank rates impacted demand, sterilisation – as the technique is known – has worked well.

And why wouldn’t it? So long as the rate that the ECB pays is higher than interbank rates, then why would a lender not want to park their funds at the central bank?

In theory, there is no reason why this should change regardless of the size of the programme. Read more

The ECB denies nudging Portugal towards its bail-out, but data just released suggest otherwise. Despite growing problems in the eurozone the ECB bought no government bonds last week. Buying government bonds either at auction or through the secondary market is a practice employed heavily in the past but frugally of late to suppress the cost of debt in vulnerable economies and shore up market confidence.

It also means the ECB did not buy any bonds in Portugal’s punitive bill auction last week. The prohibitive cost of debt at that auction is likely to have influenced Portuguese policymakers in seeking a bail-out. Lisbon is facing the expiry – and therefore the refinancing – of nearly €4.4bn debt in mid April and the bill auction gave an indication of the market’s likely price. Read more

Markets are showing signs of stress over Portugal following Moody’s three-notch downgrade of Greece as we approach a significant bond auction on Wednesday.

Yields on the ten-year government bond reached 7.65 per cent today – a euro lifetime high – indicating Lisbon would need to pay these sorts of levels if it tried to issue ten-year debt now. (Or Wednesday.) If it goes ahead, the auction is intended to raise €0.75-1bn. This is optimistic, however. The last two auctions raised just €1.25bn between them.

So, assuming Wednesday’s auction raises €0.75bn (optimistic), the IGCP will have raised about €2bn since the start of the year from the market in bonds. Rumour has it that the agency has about €4bn in cash. So that’s €6bn, excluding bills. So what does Lisbon’s debt management agency, the IGCP, need, and by when? The answers are sobering. Read more

Rumour has it Europe’s central bank has once again been buying Portuguese government bonds, to shore up demand and reassure existing bondholders. Apparently they’re buying 5-year bonds. Similar rumours flew around last week as yields topped 7.63 per cent during the day – following three weeks in which the ECB had been absent from government bond markets.

Yields on retraded – or “secondary” market – government bonds are a proxy for a government’s cost of debt. (They are not the actual cost of debt, which occurs when the government auctions debt off in the “primary” market.) Read more

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

Ralph Atkins

A debt restructuring in Europe “is not in the plan,” Jean-Claude Trichet, European Central Bank president, has just told Bloomberg Television. The ECB would certainly hope that was not the case – it would worry about contagion effects.

But Mr Trichet’s choice of words did not appear to rule out the possibility in every eventuality. Perhaps that was wise: the consensus among financial market economists is that the level of Greece’s public indebtedness makes some kind of Greek rescheduling inevitable in coming months or years.

The ECB’s thinking towards Greece etc has not necessarily changed, however. Read more

And down they go again. A mere €146m ECB-bought bonds settled last week, following a bumper, €2.3bn, week the week before. As serious discussions began about enlarging the funds or the mandate of the EFSF, markets calmed and government bond yields fell, requiring less intervention from the ECB. Relatively speaking, however, bond yields remain high.

One idea floated at the discussions is that the EFSF will be allowed to lend money to sovereigns to buy back their own debt.

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

The Swiss National Bank no longer accepts Ireland’s government bonds as eligible collateral in its repo operations. It’s probably not earth-shaking for holders of Irish government bonds, following earlier margin calls on these assets by LCH.Clearnet last year. On the other hand, it’s an interesting window into how at least one European central bank is taking care over its collateral, unlike a few others we could mention.

Modifications to the SNB’s collateral baskets over the last year emerge in this little spreadsheet (Excel file). Several other Irish-domiciled assets also became nicht Repo-fähig in late December 2010, around the time Ireland lost its last AA- credit rating. Anglo Irish medium-term notes, Depfa bonds, etc.

The SNB’s eligible collateral criteria require that securities posted for repo have this AA- rating and that their country of domicile also bears the same rating, which seems open and shut. Until you read that the bank can make exceptions for sovereign securities rated below AA-.

 Read more