As the US Treasury releases data on major foreign debt holders, the Council for Geoeconomic Studies has a cautionary tale on the foreign ownership of debt. Hank Paulson apparently claims Russian officials approached the Chinese in the summer of 2008 suggesting both countries sell off large amounts of debt issued by Fannie and Freddie. The Chinese apparently declined (see chart).
CGS warns on the dangers of relying on foreign banks to buy one’s debt. In addition to food security and energy security, should we now fret about debt? Maybe the Japanese have the right idea, encouraging their menfolk to buy bonds….
In the few days since Naoto Kan took over as Japan’s prime minister an economic narrative has emerged: he’s a deficit hawk who’s going to put up consumption tax and end Japan’s huge and enduring budget deficits.
Mr Kan’s comments and actions have certainly helped. On Tuesday he said that “rebuilding the nation’s finances is a prerequisite for growing the economy,” and he has appointed Yoshito Sengoku as chief cabinet secretary and Yoshihiko Noda as finance minister, both reputed to be deficit cutters.
But hang on a minute. Mr Kan’s focus on Japan’s debt is a clear break from previous prime ministers, but I think it’s only part of the story, and I wonder whether it’ll survive an encounter with the enemy.
Only part of the story
Mr Kan has just ended five months as finance minister. The main feature of those five months was Greece’s debt crisis. It’s hardly a surprise that Japan’s debt is at the top of his mind.
Fiscal policy is hardly the defining issue in Mr Kan’s career, however Read more
It is one month since the announcement of the €750bn “shock and awe” international rescue package to save Europe’s government debt markets – and the results so far are not encouraging.
A key part of the plan was the European Central Bank’s decision to buy eurozone government bonds to stop the relentless rise in government bond yields of the weaker economies on the monetary union periphery. Yet the bond yields of Italy and Spain, which hit fresh peaks on Monday, are higher than they were before the emergency rescue plan was announced. Read more
Spain came close to its first debt auction failure on Tuesday, highlighting the funding problems for weaker eurozone economies.
The government’s difficulties in selling €6.44bn ($7.96bn) in one-year and 18-month bills sparked worries over its 10-year debt auction on Thursday. Read more
This week saw the biggest fall since August 2007 in central banks’ holdings of US marketable securities — the first fall for 13 weeks.
The $11bn fall is only 0.4 per cent of the $3,055bn holdings of Treasury and Federal agency securities, and holdings change with great volatility. But, as you can see from the chart, any large fall is rare. Read more
About €35bn. That is a rough estimate of eurozone government bond purchases by European central banks since Monday.
Spreads between peripheral countries’ debt and bunds have been narrowing, as dealers report strong purchases of Portuguese, Irish, Greek and Spanish bonds. Maturities are reported at up to 10 years and lot sizes are €25m – €50m. Read more
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.
The UK government has just secured £2.25bn debt to be repaid over 17.5 years at a rate of 4.472 per cent. This is pretty good going, relative to other European countries: the rate (middle dot, green line) is only fractionally higher than the Feb-Mar yield curve (red line). Maybe, as Chris said yesterday, the UK is just lucky, for now. (Source data: Debt Management Office.)
Recently, Ireland hinted it might skip some debt auctions. Now Portugal has gone further, offering to buy back the remaining €4.6bn of €5.6bn May bonds maturing next Wednesday. (The country bought back €1bn on Monday.)
As well as lowering the cost of debt, the moves are intended to calm markets that are hypervigilant to signs of sovereign debt distress. Both countries are signalling their solvency by using their cash buffers to guard against unusually high cost of debt at current auctions.
We might not consider the US, UK or Japanese economies as safe havens at the moment, but for bond investors they represent an oasis of calm in a troubled world. US treasury yields – formerly on the rise – have been dropping substantially in the wake of eurozone woes. The 52-week yield auctioned yesterday had an investment rate of 4.27 per cent, compared with 4.94 per cent in the April auction.
Falling yields are also seen in longer-dated issues, such as 5- and 7-year bonds auctioned recently.
After recent rises in US bond yields, recent auctions in the 5-year and 7-year bond markets show yields falling to to 2.54 and 3.21 per cent, respectively. We would expect this, to some extent, as demand increases for investments perceived as safe, while the eurozone is in turmoil. The question is: is this as much a reduction as we would have thought? If not, expect the US cost of debt to resume its previous upward trend when Europe has calmed down a bit.
The Greek cold has turned into ‘flu, and Portugal has started sneezing.
The Greek government’s cost of debt rose dramatically today, and the cost of insuring that debt rose with it —spectacularly. Greek 1-year credit default swaps are trading (very thinly) at an all-time high of 1000 basis points, according to Markit data; a 57 per cent rise in a day. It now costs €1m to insure €10m 1-year debt. The markets are effectively pricing in a debt restructure within the year. Read more
The cost of government debt is rising almost vertically in Greece today, and rumour has it that no-one is selling insurance against the debt’s default.
This follows news of a worse-than-expected Greek budget deficit of 13.6 per cent. Previous estimates pinned the deficit at 12.9 per cent. Read more
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
First the euro rose—on relief—and then it fell—on concern.
Relief because there was plenty of demand for Greek debt: today’s €1.2bn auction of 26- and 52- week rollover debt was oversubscribed. So Greece can, for now, still raise debt through the market – no bail-out required. Read more
The central bank of Greece is making life harder for those short selling its debt.
Traders’ short positions will be automatically covered at the end of each trading day by the country’s Electronic Secondary Securities Market, HDAT, run by the central bank.The short positions will be covered regardless of the price. The move could reduce liquidity and increase trading costs. Insofar as it reduces short selling of Greek bonds, it should increase the price and reduce the yields. The yield is the interest rate paid by the Greek government on the debt they issue. Read more
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.
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
The Greek central bank would pay a lower interest rate on 30-year debt than on 10-year debt, if issued today. Usually, longer-term debt commands higher interest rates, as investors want compensation for the additional risk of holding the debt for longer.
Demand for shorter-dated debt provides an explanation. The shorter-dated end of the curve (left hand side) has moved up far more than the longer-term end (right hand side).
Most outstanding Greek debt is due to expire (and need refinancing) within the next ten years (see left).
In 2009, this partly negative yield curve was rare. So far this year, it has been more common. The most inverted curve occurred around February 8, when an IMF bail-out was mooted. Yields since then have dropped for all terms, only to rise again – extremely sharply, and to record levels – since Easter. Although a bail-out plan has been agreed in principle between the EU and IMF, there is disagreement over how much Athens should pay for help. Most nations agree on a rate of 4-4.5 per cent for debt, but Germany says market rates are appropriate. Read more
Japan’s quarterly Flow of Funds data is out today which means an update on who is doing what in the huge Japanese government bond market.
The data is as of the end of December 2009. It covers both JGBs and Treasury Discount Bills and I’ve tried to group it in the same categories used by the Ministry of Finance. A few notes:
- Foreigners have continued to ditch Japanese government debt and are down to 6.2 per cent of the total market, the lowest since mid-2007. Read more