Friday, September 16, 2011

Bond yields, prices and turnover

Yields on Irish government bonds have been going through a period of relative tranquillity for the past three weeks are so.

Bond Yields 1Y to 16-09-11

After surging above 14% in mid-July, the 10-year yield as calculated by Bloomberg fell rapidly for the next six weeks.  Since the start of September the 10-year yield has been below 9% and finished today at 8.593%.  The yield is still only back to where it was at the start of the year and will need to fall to 6% (and most probably lower) before a broad return to borrowing from bond markets can be undertaken.

The swings in the 2-year bond yield have been even more dramatic.  These peaked at over 23% in mid-July and are now down to 9%.  This can be readily shown by looking at the daily closing price of the Irish government bond that is due to mature in January 2014.

Jan 2014 Bond Closing Price

If you could find a seller this bond, with a €100 maturity value on the 15th January 2014 and a 4.0% coupon, could be bought for less than €70 for a short time in mid-July.  If the bond and interest are repaid in full this €70 investment would be worth around €110 – hence the yield of more than 20%.  The price of this bond has been around €90 for the past month.  Still attractive – but only if you think the Irish government can find the €12 billion it needs to repay this bond in January 2014.

Finally, on bonds here is an update of a chart we have looked at before – the Irish Stock Exchange turnover of Irish government bonds.

Bond Volumes

Although volumes in September are a little lower than they were in August, they are still ahead of the very low rate levels seen for much of the first seven months of the year.

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