Friday, November 5, 2010

Bond Yields continue to soar

Breaking through 6% in the middle of September was significant, breaking through 7% a week ago was significant but now it seems we’re hurtling towards 8%, and no Information Note seems to be stemming the tide.  Here’s a few screenshots lifted from Bloomberg.

Bond Yields 3M to Nov 04

Markets were closed by the time the four year adjustment and growth projections were released yesterday.  How has the reaction been in this morning’s early trading?

Bind Yields Nov 05

It is that this report posed to the FT website last night didn’t help.

Clearing house warning to Irish bond traders

Fears over the health of the eurozone bond market intensified after one of Europe’s biggest clearing houses warned investors they could be compelled to stump up substantially more money to trade in Ireland’s debt.

LCH.Clearnet told members they might be required to deposit more cash to trade in Irish sovereign bonds, a move that is being widely interpreted as a signal that the organisation will act next week.

LCH.Clearnet has contacted members in the past few days to say that, under newly introduced rules, it has the power to impose a 15 per cent “haircut”, a cash deposit to help indemnify against default risk, against Irish bonds if it determines that the risk of the Irish government defaulting has increased.

A spokesperson for the clearing house said: “We have the ability to do so should we decide to do so.”

Any move by LCH.Clearnet to increase Irish debt margin requirements could undermine the Irish banking system.

Irish 10-year yields rose for the eighth day on Thursday, jumping 19 basis points to a fresh record of 7.49 per cent since the launch of the euro.


  1. It's been denied by LCH.Clearnet.

  2. .. and ten year spreads vs bunds closed down on the day ..

  3. Hi Anon,

    The denial by LCH.Clearnet has not been getting much coverage but it is out there.

    And yes, 10-year Irish bond yields actually closed down on the day (graph)and with a small rise in bund yields the spread did narrow on Friday (graph).

    A once-off event or the start of the a trend?

  4. Well, back of the envelope time …

    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.

    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.

    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.)

    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!

    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.

    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.

    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.