Changes along the yield curve

The following image are screengrabs from Bloomberg for the yield on Irish government bonds over the past three months.  The top two are the 8-year and 5-year yields, while those across the bottom are the 3-year, 2-year and 1-year yields.  Click the image to enlarge.

The actual bonds on which these indicative yields are derived can be seen in the NTMA’s Daily Outstanding Bonds Report.

There are two things worth noting.  First, is the continued upward-sloping yield curve for Irish government bonds.  The yields as calculated by Bloomberg go from 1.59% over one year to 5.90% over eight years.

Second, is the differing performance of the bonds over the past three months.  The longer term yields in the top row show a big shift in the aftermath of the EU summit of  at the end of June but show little change since then.  The eight-year has slowly edged below six percent but the five-year is largely where it was in the days after the summit.

On the other hand the shorter term yields of three years and under have all declined steadily over the past three months.  The three-year and two-year were declining in advance of the summit, experienced a small drop after it and have continued downward since.

Over the past three months the three-year yield (which is well outside the window of the current EU/IMF funding programme has gone from over seven percent to just under three and a half percent.  The two-year was also above seven percent but in just three months has now dropped to just two and a half percent.  The clear view is that the D-day bond due to mature in January 2014, which at one stage represented a funding cliff of around €12 billion, will be repaid. 

This January 2014 bond is now yielding around 2.2% is now trading at a price of around €102.40 per €100 unit (coupon 4.0%).  Last July, this bond briefly fell to as low as €65 per €100 unit.  That is a rise of nearly 60%.

The one-year yield has also declined recently but that is within the timeframe of the EU/IMF funding.   It might also be a factor that trading volumes over this period may be low but the NTMA report does show that there are trades occurring at these yields.

Tweet

Retail Sales going nowhere

The release by the CSO of the provisional July figures for the Retail Sales Index continue to show a sector that is moribund.  Here is the retail sales index excluding the motor trades (which have a 21.6% weighting in the overall index for July).

Monthly increases in the indices are not unusual; what is unusual a sequence of positive monthly increases.  During 2008 and 2009 the series fell precipitously.  This fall moderated during 2010 and the pattern since has been monthly fluctuations around a slightly falling trend-line.  The annual changes reflect this pattern.

Finally, here are the monthly changes in the series which highlight the inconsistency of the monthly changes.

Tweet

Eurozone sovereign bond ratings

Here is an update of a previous table with the addition of EZ ratings from Canadian firm DBRS (Dominion Bond Rating Service).  DBRS do not provide a rating for all EZ countries but their ratings can be important as shown below.

This Bloomberg article from July 2011 explains how the ECB uses the ratings from these four companies.

The ECB determines the size of the premium, or so-called haircut, it applies to government bonds on the basis of the best credit rating from four companies -- Standard & Poor’s, Moody’s Investors Service, Fitch Ratings and DBRS. DBRS currently rates Ireland at A, two steps higher than the grades of S&P and Fitch and four steps above that of Moody’s.

DBRS’s rating means the ECB applies a 3 percent haircut on fixed-coupon Irish bonds with a residual maturity of five to seven years and a 4 percent premium on paper that will expire in seven to 10 years. Bonds rated BBB+ to BBB-, like those of Portugal, incur premiums of as much as 9 percent, as does debt from Greece, which is accepted as collateral independently of its rating.

Last week’s confirmation by DBRS of the A(low) rating for Ireland meant we ‘dodged a bullet’ in the words of this Wall Street Journal post

Canadian rating firm DBRS Inc. just showed the little guy still matters.  The fourth-biggest rating company downgraded Spanish and Italian government debt late Wednesday, and affirmed its stance on Irish bonds.

With the “big three” controlling around 95% of the global ratings market, DBRS doesn’t command the same attention. But when it comes to the euro-zone’s financially troubled countries, it should.

Because the European Central Bank listens to DBRS just as it does to the others.  DBRS is one of the four ratings firms the ECB uses when deciding how much it charges investors for using sovereign bonds as collateral in exchange for loans.

Luckily for those keen to avoid shakeouts in euro-zone bond markets, DBRS still rates those governments in the “A” category, with an “A (low)” for Spain and Ireland only one notch into the area. Italy is three notches above at an “A (high).”

Cutting them below an A-rating level would have spurred the ECB to charge 5% more for using Spanish and Irish government bonds as collateral.

DBRS have Italy at “A” rather than “A(high) as stated in the article.  Also the ECB’s collateral framework is set to be overhauled in September which may change the significance of these ratings.

Tweet

Irish government bond yields

Bloomberg calculate a number of indicative yields for government bonds at different maturities.  For Ireland they currently provide 1-year, 2-year, 3-year, 5-year and 8-year yields.  The yield curve is upward sloping with the following yields (as of 15:45)

• 1 year: 1.91%
• 2 year: 2.74%
• 3 year: 3.73%
• 5 year: 5.38%
• 8 year: 6.04%

Over the past month or so there has been a contrast in performance between those at the shorter end of the range (less than three years) and longer maturities.  This chart from Bloomberg compares the performance of the 2-year and 8-year yield relative to their positions 3 months ago.

Tweet

Core Inflation Rises

Yesterday’s Consumer Price Index release for July from the CSO shows the overall rate of inflation falling for the fourth month in a row.  However, the source of inflation in Ireland is slowly beginning to shift.

July marked the since the start of 2010 that the overall inflation rate was equal to the ‘core’ inflation rate.  In this instance the core inflation rate is the 85% of the overall index that excludes energy products and mortgage interest.

The overall index is being pulled down by reductions in mortgage interest (particularly for trackers with ECB rate now at 0.75% compared to 1.50% this time last year).  Excluding mortgage interest inflation is still running at 2.3%.  Since March the overall rate of inflation has fallen from 2.2% to 1.6%.  However there has been no significant drop excluding mortgage interest is just from 2.4% in March to 2.3% now.

Annual inflation is now being driven up by the following products (number in brackets is the expenditure weight in the CPI showing the importance of the price change):

• Tobacco (2.6%) +6.5%
• Private Rents (4.4%) +2.0%
• Housing maintenance materials (0.3%) +3.9%
• Non durable household goods (0.7%) +2.3%
• Electricity (2.3%) +14.5%
• Gas (1.2%) +18.1%
• Health (4.6%) +0.7%
• Motor fuel (6.1%) +6.3%
• Motor tax (1.2%) +10.8%
• Bus and taxi fares (1.0%) +6.4%
• Air passenger transport (1.6%) +3.0%
• Newspapers, books and stationery (1.5%) +1.7%
• Package holidays (0.7%) +3.3%
• Third-level education (1.6%) +13.5%
• Licensed premises (6.5%) +1.7%
• Health insurance (2.9%) +15.3%
• Motor insurance(1.7%) +1.7%

There are numerous categories that have seen price declines as well and these are in the detailed sub-indices from the CPI.

Tweet