tag:blogger.com,1999:blog-2826531655042170344.post8842723815371312376..comments2024-03-26T11:29:52.986+00:00Comments on Economic Incentives: Bond Yields continue to soarSeamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-2826531655042170344.post-17320777842946040112010-11-07T18:06:07.525+00:002010-11-07T18:06:07.525+00:00Well, back of the envelope time …
In the event of...Well, back of the envelope time …<br /><br />In the event of a post-2013 restructuring – now that the Germans have thrown the spanner in – what would be the recovery rate? Moody’s studies suggest 70% for voluntary, 40% for involuntary.<br /><br />So I’d go for at worst 70% (principal + accrued interest) in Ireland’s case. I say “at worst” because 1) Ireland is a very wealthy country in comparison to previous sovereign restructurers; 2) the implied “saving” would not represent the full bailout cost, but it’s a good chunk of it – 30% forefeiture passes the reasonable man test in the circumstances, and 3) we would be looking at the “worst” ratio – gross/GNP – stabilising around 100%, and the “best” ratio – net/GDP – in the 60% to 70% range. These are acceptable numbers, provided the fiscal front is well managed from here on in.<br /><br />The price of the 10y at current yields implies a capital loss of some 27% should a 30% haircut be imposed after 2013. (Obviously this number gets nastier the bigger the haircut, but I find it hard to believe that Ireland is in such dire straits that it needs to smash up its bondholders to the tune of say 50%. That would get net debt/GDP under 50% – this is taking the piss.)<br /><br />What often gets forgotten in these scenarios is that yields would surely drop following the restructure, provided there’s a sense of closure. Back to 200bps over bunds? 100 over? In time, why not? – Hungary has dropped from 1000 over to 450 over in not much more than 12 months. At 100 over, the price loss (vs bunds) to the investor is approximately ….. zero!<br /><br />Moreover, even though it’s a bit late in the day, surely the more attractive option for the Irish State would be something like the proposal popularised by Morgan Kelly and the FT in which the sovereign is “saved” and the bank seniors get duffed up. You might not see 100 over bunds, but there’d be no sovereign haircut.<br /><br />The interesting one is 10y Greece at 1050 over – even on a 50% recovery, provided yields trade back to 200 over bunds (they were there not that long ago), you again break even.<br /><br />And of course, a restructure is by no means a done deal. Therefore the central case has to be for more volatility around these levels, with a downtrend starting next year, provided the growth numbers aren’t horrible.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-49853456546807812182010-11-06T13:00:56.465+00:002010-11-06T13:00:56.465+00:00Hi Anon,
The denial by LCH.Clearnet has not been ...Hi Anon,<br /><br />The denial by LCH.Clearnet has not been getting much coverage but it is out <a href="http://www.lse.co.uk/FinanceNews.asp?ArticleCode=enl2ufc29rmua06&ArticleHeadline=LCHClearnet_denies_Irish_debt_margin_call" rel="nofollow">there</a>.<br /><br />And yes, 10-year Irish bond yields actually closed down on the day (<a href="http://lh5.ggpht.com/_iSagC8HPtNA/TNVQ7JKPmRI/AAAAAAAABuM/LTbcnADR5RM/s1600-h/Bond%20Yields%201W%20to%20Nov%2005%5B2%5D.jpg" rel="nofollow">graph</a>)and with a small rise in bund yields the spread did narrow on Friday (<a href="http://lh3.ggpht.com/_iSagC8HPtNA/TNVQ8qrrHkI/AAAAAAAABuU/ajRMVzEqE-0/s1600-h/IRE-GER%2010%20Yr%20Spread%201W%20to%20Nov%2005%5B2%5D.jpg" rel="nofollow">graph</a>).<br /><br />A once-off event or the start of the a trend?Seamushttps://www.blogger.com/profile/15679299530222667673noreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-65202066476936066412010-11-05T20:05:43.603+00:002010-11-05T20:05:43.603+00:00.. and ten year spreads vs bunds closed down on th..... and ten year spreads vs bunds closed down on the day ..Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-34816194727259514402010-11-05T11:46:06.947+00:002010-11-05T11:46:06.947+00:00It's been denied by LCH.Clearnet.It's been denied by LCH.Clearnet.Anonymousnoreply@blogger.com