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.

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.

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.

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.