Friday, April 22, 2011

Bond yields soar

Two weeks ago we looked at the fall in Irish government bond yields that occurred in the week following the announcement of the stress test results.  The stress tests offered some credibility to our attempts to solve the banking crisis, but making AIB a ‘pillar’ bank with annual losses of €12 billion to be covered, bringing to €20 billion the total pumped in by the State may have dampened the optimism somewhat.  Looking at bond yields now, we can see that they’re at new record levels. 

Here’s the 3-month graph from Bloomberg showing the yield on 10-year Irish government bonds. 

Bond Yields 3M to 21-04-11

For further confirmation of this deterioration you can see the yield on two-year bonds here.  These are streaking upwards and at nearly 12% are almost three percentage points higher than they were at the start of the month.  A similar pattern can be seen for five-year Credit Default Swaps (the cost of insuring Irish debt) here.

There has been little in the way of economic data released recently and nothing so negative to explain the surging bond yields.  Those buying or recommending Irish bonds have gone rather quiet.  Talk of the stable outlook from Standard & Poor’s has been replaced by the continued negative outlook from Moody’s.

So what happened?  It could be down to the watery statement from the EU/ECB/IMF team that undertook a review of the support process.  The yield rise had begun by the time the statement was released but it had been leaked by degrees over the previous few days.  The statement includes (emphasis mine):

The teams’ assessment is that the program is on track but challenges remain and steadfast policy implementation will be key.

Ireland is making good progress in overcoming the worst economic crisis in its recent history.

The may as well have said “the plan is working, we’ve turned the corner”!  The yield rise actually began earlier that week after the IMF had cut its 2011 growth forecast for Ireland from 0.9% to 0.5%.  Is this significantly different from zero?

So if we take the IMF’s statements from that week and combine them we get “Ireland is making good progress but things are getting worse”.  Sounds a bit like an Irish solution to an Irish problem.  It seems the IMF have learned that trick from us.  The truth is, though, that we need more than wordplay to navigate our way out of this crisis.  And the yields above indicate that the words aren’t working.


  1. It's Greece Seamus--if they need and get restructuring, we're next.

  2. It sure looks that way. The Greek numbers are going off the chart! Two year yields are now north of 23%.

    Of course, the impact for Ireland is if Greek debt is restructured is that it sets a precedent. A Greek restructuring doesn't make our debt problem any more or any less worse, it just changes the environment in which the decisions will be made.

    I beginning the think that there is a growing remove between the actual probability of an Irish default/restructuring and the "market's" perception of whether such an event will occur. Just the same as a big gamble on a horse doesn't make it any more or less likely to win the race.

  3. Now there are conspiracy theories running about that this is exactly what the markets want