Friday, July 29, 2011

Bond Yields Track Downwards

The surge in Irish government bond yields that preceded the EU emergency summit in Brussels last week has been more than fully reversed.  In the week since the summit the prices of Irish government bonds have been steadily rising.  At the close yesterday the 10-year yield constructed by Bloomberg was down to 10.5%, significantly down from the seen just prior to the summit.

Bond Yields 6M to 29-07-11

The 10-year yield is now back to levels last seen in the middle of May.  There is still a very long way to go before these rates would allow us to sustainably raise private funding (the revised rates on loans received through the EU will be around 4%), but the current moves are at least in the right direction.

The fall in Irish 10-year yields this week contrasts with the movements for some other EU countries.  Here are the Monday opening and Thursday closing 10-year yields for a group of  EU countries.  Click the country name to go through to the Bloomberg app for that country’s 10-year bond yields.


Monday Open (percent)

Thursday Close (percent)

Weekly Change (basis points)

























The 130 basis point drop in the Irish 10-year yield is a noticeable outlier.  Only Portugal amongst this group has also seen a drop in bond yields but the drop in Irish yields has seen them drop below Portuguese levels for the first time in more than a year. 

Yields for Greece, Spain, Italy and Belgium have all risen this week, with Spain continuing to have yields above the benchmark 6% level.

Thursday, July 28, 2011

Retail sales slide again

The CSO has just released the June update of the Retail Sales Index.  The first impressions are that retail sales are rising and some media reports reflect this (Irish Times: Retail Sales Rise in June).  It is true that the overall index is up 0.2% on June of last year, but if we strip out the effect of the motor trades a somewhat different picture emerges.

The motor trades category makes up 23.2% of the retail sales index in June and the motor trades had an artificial jump in June created by the closing of the car scrappage scheme.  By volume motor trade sales were 22% up on the same time last year. 

What do we see when we look at the other three-quarters of the index?

Ex Motor Trades Index to June

This is no where near as positive as the overall index (graph here).  The best that can be said about the above graph is that the rate of decline seen since March eased somewhat in June.  However, as has been said over and over in this crisis, “getting worse more slowly is not the same as getting better”.  Retail sales are continuing to decline.

The relative improvement compared to the last few months can be seen when we look at the monthly changes but both series remain below the zero line.

Monthly Change Ex Motor Trade Index to June

The annual changes show how moribund retail sales remain.

Annual Change Ex Motor Trade Index to June

Friday, July 22, 2011

Two-Year Bond Yields Plummet

The market reaction to yesterday’s EU summit (release here) has been dramatic.  We watched the recent alarming rise in the Irish two-year bond yields constructed by Bloomberg.  This is largely based on the €12 billion bond we have maturing on the 15th of January 2014.

Bond Yields 1Y to 22-07-11

In the past fortnight these rose from 13% to 23% (though we did note that this was based on low volumes).  In the days preceding the emergency EU summit the yields began to fall and were down to 19% at the close yesterday.

What has happened this morning?

Bond Yields 1D 22-07-11

The yields have been dropping like a stone!  After opening just above 19%, the yields are now down to 14.5% – the price of Irish bonds has risen substantially in morning trades. This movement is undoubtedly welcome and the short term market outlook for the Irish economy is more stable but we won’t be popping the champagne just yet.  The tw0-year bond yields are simply back to where they were a fortnight ago.

The movement in the key 10-year yield has been less dramatic.  At its local maximum it reached over 14% on Monday and had fallen to 12.3% by the close yesterday.  By half nine this morning it had fallen, but only to 11.8%.  Yesterday’s summit has done little to change the long term view of the Irish economy.

The reduced interest rate means there will be more money in the kitty to pay the January 2014 bond.  The yield on this has fallen.  Our long term ability to return to markets has not improved and the 10-year yields remain prohibitively large and like the two-year yield are only back to where they were a fortnight ago.

We have probably got as much as a concession from Europe as we are going to get for the next 18 to 24 months.  Getting our own house in order (i.e. having a lower deficit) can bring us much further.

Friday, July 15, 2011

Solutions to Problems

I have to assume that Ajai Chopra is a man who is very careful with his words.  It came as a bit of a surprise that he said the following when discussing the EU/IMF rescue package after quarterly review in April.

“It represents an Irish solution to an Irish problem and it enjoys our support. In the root of the problem was a deep banking crisis and that’s where the emphasis of this programme is. The new government is making good headway on this front.”

It is very unlikely that Chopra would have used the phrase “Irish solution to an Irish problem” without knowing the local context of the phrase.

Chopra revisited the phrase in a manner this week when he returned for the third quarterly review.

“The problems that Ireland faces are not just an Irish problem.  They’re a shared European problem. What we need and what’s lacking so far is a European solution to a European problem.”

Thursday, July 14, 2011

Core inflation edges down

The June Consumer Price Index shows little change in inflation. The overall inflation rate remained at +2.7%, the level recorded in June, while our measure of core inflation, excluding energy products and mortgage interests, fell slightly to +0.5%.

Core Inflation June 2011

Our conclusion from May remains valid.

The measure of core inflation used here accounts for around 85% of the total index so those who are suffering from rising prices are:

  • those with standard rate mortgages with mortgage interest in the CPI (weighting 6.66%) up 24.1% on the year (we can also expect a further increase in ECB linked tracker mortgages over the coming weeks), and
  • those who purchase a lot of fuel with energy prices in the CPI (weighting 7.77%) up 11.6% on the year.  These are particularly drivers, as petrol and diesel make up about 50% of the energy subgroup and are up 13.8% on the year.  See here.   The other half of the energy sub-group (electricity, gas, liquid and solid fuels) is also rising up 6.8% on the year.

So somebody who has a standard variable rate mortgage and drives a lot is facing significant price increases compared to 12 months ago.  Outside of these particular cases the average inflation rate is quite low with the other 85% of the index rising only 0.5% on the year.

Irish Examiner Article 14/07/2011

I had an article in today’s Irish Examiner examining the implications of the recent movements in Irish bond yields and the downgrade to junk status of the same bonds by Moody’s. 

The article was not carried by the online version of the paper but a rather scratchy scan of the newsprint version can be seen here.  Alternatively, the text submitted is provided here.

Funding Crucial To Get Us Through Key 2014 Date

The downgrade of Irish government bonds to junk status by Moody’s has generated a lot of reaction, but has not actually changed the reality that Ireland faces. In this reality Ireland’s general government debt (GGD) at the end of 2010 was €148 billion, although this can be offset by €16 billion of cash reserves we also held. 

Between now and 2014 the annual budget deficits will increase the debt by another €50 billion.  By the end of July, our borrowings will have increased by a further €8 billion as part of the ongoing recapitalisation of the banks. 

The 2014 general government debt will be close to €210 billion or around €190 billion if you want to consider the net figure by subtracting our cash reserves. This will be around 110% of GDP which puts us in the danger-zone of debt levels but it is not a terminal level of government debt.

One question that must be addressed is whether we can actually get to 2014 when it is forecast that our public debt will have stabilised and maybe even begun to decline.  Bond markets are of the clear view that we cannot survive to 2014, and this view has been subsequently embraced by Moody’s in Tuesday’s downgrade.

The EU/IMF deal provides €50 billion for the running of the State.  If the only use of this money was to fund the annual deficits then it would seem likely that we could make it to the end of 2014, and the €16 billion of cash reserves would certainly guarantee that.

However, we also need funding to pay off the maturing of existing debt.  Usually this is simply rolled over by borrowing from someone else in bond markets.  We are shut out from these markets so the money to pay off our existing debt must also come out of the EU/IMF package.

Over the next four years we have around €44 billion of debt repayments to make.  To get to the end of 2014 we actually need €94 billion of ongoing funding.  Between our own cash reserves and the EU/IMF money there is €66 billion available.  This will be fully exhausted sometime in the middle of 2013.  In just over two years the Irish State will be broke. Bond market investors know this.

Among the €90 billion of government bonds there are issues that will mature in November 2011 and April 2012.  These are trading at relatively low yields, with the November 2011 bonds yielding 5.5% indicating that buyers believe these will be paid off.  They will be.  After this, the yields on Irish bonds soar. 

The highest yielding Irish bonds are €12 billion of bonds due to mature on the 15th January 2014.  These now have a yield of over 17%. A 100 euro unit of these bonds would provide about €10 of interest payments over the next two and a half years and a €100 maturity payment in January 2014.

This bond, which has to potential to generate €110, can now be bought for about €75. Markets do not believe that these bonds will be repaid in full.  With the State forecast to run out of money in the middle of 2013 this is a perfectly reasonable assumption to make.

The 15th January 2014 is a key date for the Irish economy.  If we can get past this date we will afford ourselves some breathing space. After January 2014 it is more than two years until the next bond rollover date arises in April 2016, and if we have brought the deficit under control our dependence on funding could be very low. 

In the meantime, though, Ireland will run out of money in the middle of 2013.  Current bond market yields suggest that we would have to pay over 13% to raise private funding.  Borrowing at rates of even half of that is not sustainable.

The current plan is that this Ireland will return to bond markets in late-2012, but with yields where they are now that cannot happen.  This means we will be bust before we can raise any more money and the bust will come first. The Moody’s downgrade reflects this reality.

If we choose to avoid this outcome we will need additional support from the EU/IMF.  The original €85 billion bailout had €35 billion set aside for the banks.  It now appears that not all of this will be used and the IMF have indicated that the leftover money can be transferred to help fund the State. 

If an extra €30 billion or so were made available it would guarantee funding through the crucial January 2014 period.  Once markets see that we can get to the stage where the debt is sustainable it is likely we can source more of our funding privately and begin to stand as an independent state again. This will also require a substantial improvement in domestic economic indicators and political acceptance of the necessity of ‘Bailout 2’.

The Irish economy can emerge from this crisis, but it would be utter incompetence to let it fail because we did not have the required funding in place to get us through January 2014.  Whatever about the rhetoric from the Government in public we must hope that in private they are dealing with reality and ensuring that this money will be available.

It appears that there is at least one person who agrees with me!

Trade Volume in Irish Bonds

Much has been made of the recent movements in Irish bond yields in the days leading up to the junk status downgrade from Moody’s.  We have been following dramatic graphs like the following based on the two-year yield constructed by Bloomberg.  The rise in the past week has been vertiginous.

Bond Yields 1Y to 14-07-11

One question that emerges when looking at a graph like this is “how much volume is behind this move in prices?”.  The Irish Stock Exchange can provide the answer.  Here will we focus on the €11.8 billion bond due to mature on the 15th January 2014 – the so-called D-Day Bonds – which form the main constituent of the two-year yield estimated by Bloomberg.

Here is the daily closing price of this bond since the start of 2010.  A price of around €100 corresponds to a yield of around 4%.  The drop in price since the middle of last year has seen the yield rise. 

Bond Closing Price

The price drop that has given rise to the recent surge in yields is evident.  The yield is now around 18%.  This bond can now be bought for less than €70 – if you can find someone to sell it.  Here are the daily volumes of this bond over the past 18 months.

Bond Volumes

It is pretty clear that since January the volumes of trade has been much lower.  The series peaks on the 16th February 2010 when 2.4 billion of the 11.8 billion bond was traded.  Just over 20% of the bond changed hands on that day. 

Here are the percentage volumes of the bond changing hands for each day in 2011.

Bond Volumes Proportion

There has been only three days this year when the trading volume exceeded 1% of the total volume issued.  On average this year the daily trading volume has been 0.21% of the total.  In 2010 the average was 1.22% – nearly six times larger.

The current precipitous drop in the price of this bond began last Wednesday.  In the past week the bond price has dropped from €78.50 to €69.  The cumulative trading volume over the past five trading days is 1.2%. 

The surge in the yield from 13% to 18% has attracted significant attention, but for every 1000 units of this bond, the owners of 988 are exactly the same.  In the vast vast majority of cases those who owned Irish January 2014 bonds last Wednesday are those who own them today.  The trading volumes are very low. 

Can we infer that these are true price changes when each day only 2 out of a 1000 bonds are traded?  It will also be interesting to see what impact, if any, the downgrade to junk status by Moody’s has on trading volumes.

Based on yesterday’s closing price this bond with a nominal issue of €11.8 billion has a market value of €8.9 billion.  We could reduce the amount of debt owed on this bond by 25% if we could buy all the bonds in issue at the current market price.  Current trading volumes suggest that we would find very few bonds to buy.

Tuesday, July 12, 2011

Bond Yields continue to rise

The dramatic rise of Irish bond yields seen towards the end of last week, continued on Monday.  The rise has been greatest for bonds due to mature over the next few years.  Here the the two-year yield constructed by Bloomberg.

Bond Yields 3M to 11-07-11

In less than a week the yield has gone from 13% to nearly 18%.

The current EU/IMF deal is designed to provide Ireland with sufficient financing to cover the annual deficit and roll-over of debt until the end of 2013.  That is still two and a half years away.  The yields on bonds supposed to be covered by the EU/IMF deal is shooting up.

Whether we can actually get to the end of 2013 is another thing, but if we look a the daily outstanding bonds report (reproduced below) from the NTMA we see that the riskiest bond has shifted from that maturing in January 2014 to the bond maturing in April 2013. Click image to enlarge.

Outstanding Bonds 11-07-11

On 18th April 2013 we have a €6 billion bond maturing.  The current design of the EU/IMF deal suggests that at that time we would have enough money to pay this bond.  Markets do not believe that the deal will get that far.  At the close yesterday this bond was trading with a yield of 17.56%, the highest of all Irish bonds. 

I posted some further thoughts on these numbers over on the Independent Blog.

EURO CRISIS: Where will it all end? Follow the bond yields to find out ...

Thursday, July 7, 2011

Bond Yields go vertical

Yesterday was a staggering day for eurozone government bond yields.  The trigger was Moody’s downgrade of Portuguese government bonds by four notches.  The most dramatic response for Irish bonds was in the two-year yields constructed by Bloomberg

[Note: Ireland do not have any two-year bonds issued.  The yield is calculated using the market prices of bonds which are due to mature in around two years.  The full list of Irish bonds can be seen here.]

Here is the two-yield on Irish bonds for the past three months from Bloomberg.

Bond Yields 3M to 06-07-11

It went vertical yesterday!  This was the largest recorded basis point jump in Irish bond yields.  The two year yield  jumped more that 220 basis points, from just below 13% to just over 15%. 

The yield on the “D-day bonds” due to mature on the 15th January 2014 on which the Bloomberg two-year yield calculation is largely based surged to 15.20%.  The EU/IMF rescue package was designed to allow a return to raising money from these markets 12 months from now.  The longer the rescue package goes on the further from that we seem to be getting.

Mid-Year Exchequer Returns

The Exchequer Returns covering the first six months of the year have been released by the Department of Finance.  Here are the associated documents.

Here we will focus on the performance of tax revenue for the first six months of the year.  Tax revenue is up on 2010 but the rate of increase is lower than the 6.7% seen in April.  By the end of June, tax revenue was €847 million ahead of last year but as we will see below this is likely to an illusory increase.

Cumulative Tax Revenue to June

Every month this year has seen an increase in tax revenue compared to the same month last year.  The increase was largest in April and we explored the reasons for that here.

Monthly Tax Revenues to May

Here is a look at the revenue by the eight main tax heads reported in the Exchequer Account.  It is clear that all of the €847 million increase in tax is attributable to tax collected under the Income Tax heading.  The key barometer tax VAT is down on last year.

Cumulative Tax Revenues to May

According to the QNHS employment in the first quarter of last year was 1,857,600 and this had fallen to 1,804,200 in the same quarter this year.  The Earnings and Labour Costs Survey has average weekly earnings falling €683.43 to €674.56.  So the two key measures that feed into income tax, the number of workers and their earnings, are both down on last year.  It is pretty evident that it is not a labour market improvement that is driving the increase in Income Tax.

Income Tax is up just over €1 billion, but the €2 billion that was previously collected by the Department of Health as the Health Levy is now included under the Income Tax heading in the Exchequer Account following the introduction of the Universal Social Charge.  It is pretty clear that if a like-for-like comparison was made with last year that Income Tax revenue would be down. 

It is only because of changes in the system of public finances that it appears to be up.  We continue to collect less tax revenue rather than more.  Changing the name of money previously collected as a levy to a tax does not mean that more money is being collected.

You can read some of my views on the overall Exchequer Balance in this post over on The Irish Economy blog.

Friday, July 1, 2011

100,000 More People and our Economic Indicators

Yesterday’s preliminary Census 2011 results have suggested that the population is 100,000 larger than previously estimated.  We now have an extra céad míle daoine to be giving out the céad míle fáilte.

At first glance this would just appear to be more of a demographic than economic issue, and not one that is related to the banking, public debt and unemployment crises we face.  However, the impact of this new population figure from the Census will not have been accounted for in the other statistics from the CSO which mainly come from surveys.

A survey like the QNHS which covers 20,000 might be very good at providing the breakdown and composition of the population in proportions but it struggles when estimating the overall size.  This is why the Census is undertaken rather than rely on a survey.

As a rough division we can break the population into three groups

  • 0 – 14 years
  • 15 – 64 years
  • 65 and over

Additions to the 0 to 14 group are likely to be mainly the result of births (though migration will also play a role).  Counting the number of births should not be a problem.  Without wanting to be morbid, exit from the 65 and over group will largely be via deaths which is again easily measurable and additions will generally come from natural aging rather than migration.  It would appear that the most difficult group to track, and the one where most of the extra 100,000 are likely to be found is in the 15 to 64 age group.

We don’t know anything about these 100,000 but we can draw some inferences based on the survey findings of the QNHS.  For simplicity we will assume that all of these 100,000 are in the 15 to 64 age group though this will clearly not be the case.  We will also assume that the characteristics of this group match the characteristics of the population as a whole, though again this may not be exactly the case.

The employment rate rate among those aged 15 to 64 is 58.9% so there could be around 60,000 more in employment than previously estimated.  This would be an increase of 3.3% on the current employment estimate of 1.8 million.

There are 456,000 people on the live register.  Of these 86,000 are casual or part-time workers so there are 370,000 people on the live register with no employment.  The CSO’s official measure of unemployment is 295,000, and when asked to self-assess there are 352,000 who classify themselves as unemployed. 

These are based on survey data from the QNHS so both could increase to closer reflect the number of unemployed from the Live Register.  It is unlikely that the revised population figure will change the estimated unemployment rate.  There has been a change in the size of the population rather than a change in the composition of it.

It is hard to know what impact this more accurate population figure will have on the National Accounts.  As in the labour market the CSO are more likely to get the rates correct rather than the absolute size.  These change to the population figure is unlikely to make significant changes to the dramatic negative growth rates we have experienced in recent years.  There could be some moderation of the drops in the past year of two but nothing huge.

What is more likely to change is the absolute levels and all GDP figures could be revised up without huge changes to the growth rates.  It is impossible to say how the CSO would go about this.  Nominal GDP in 2010 is now estimated to be €156 billion.  A 3.3% rise in that would bring it up to €161 billion.

The first revision of our 2010 GDP by the CSO saw our debt/GDP ratio fall from 96.2% to 94.9%.  If the revision here was applied then the 2010 debt/GDP ratio would be 91.9%.  We are still accumulating debt but maybe we are further away than we thought from the “terminal” level of 120% that many believe we are cascading inevitably towards.

The CSO will wait until official Census results are available but it will be interesting to see how the unearthing of these 100,000 people will play out in out economic statistics over the next few years.  This is largely a statistical exercise and does not change the hugely downbeat economic reality we face, but it will be more useful to have statistics that better reflect that reality than not.