Tuesday, October 11, 2011

Bond Yields rise – rapidly

The 10-year yield on Irish government bonds as calculated by Bloomberg went back over 8% today.  It is pretty clear that there was some change about half-way through the trading day that saw the yields jump to 8.4%.  Yields fell back slightly later in the day and ended at 8.2%.

Bond Yields 1D 11-10-11

What caused the jump?  Hard to know.  There was no news or additional information on the Irish economy released today.  Yields of other PIIGS didn’t show the same jump.

When the drop under 8% occurred a fortnight ago we felt it might be temporary and that seems to how it has turned out.  There was no good news that could have been used to explain the drop from 8.2% to 7.9% on the 28th of September and likewise there is no bad news to explain today’s rise from 7.8% back to 8.2%.

Trading on Irish government bonds is relatively thin but we do know that the covered banks have been purchasers in recent months. The latest Money, Credit and Banking Statistics (Table 4.2) show that their holding of Irish government increased from €9.6 billion in July to €11.3 billion in August.  The covered banks now hold one-eighth of the total stock of Irish government bonds.


  1. Irish covered banks have the right to use their recap money to purchase Irish sov bonds. NAMA may also do this with the proceeds of their asset disposals, and their loan income. Doing so is not a risk because the bonds only default in the event of the failure of the state on which these institutions are already dependent.

    It makes absolute sense for state owned banks and NAMA to obtain rates over 8% by buying irish sov bonds while at the same time lowering secondary yields and thus helping the state to regain viability.

    Lastly, the covered banks could offer a retail savings product backed by irish bonds. A guaranteed 6% CAR for savers backed with 8% bonds. There would be no DIRT because euro sov bonds are interest free.

  2. @ paul k,

    I don't think there is anything wrong with the banks buying Irish government bonds. I am just looking for an explanation for the yield movements.

    It makes perfect sense for the banks to use the €3 billion of Contingent Capital to buy government bonds. They are being charged 10% by the State for this money. If they can buy bonds with a yield north of 8% then the net cost of the money is greatly reduced.

  3. The Slovakia effect?

  4. @ Anonymous,

    If there was a 'Slovakia' effect surely it would be reflected in bond yields across all the PIIGS? The only yields to jump yesterday were Irish so it seems to be an 'Ireland' effect of some description.

  5. What about this? Its certainly doing the rounds at the moment. http://howestreet.com/2011/10/irish-haircut/

  6. @ Anonymous,

    That is a good read but there is nothing 'new' in it. Apart from some minor speculation from an unnamed source there is little in it that anyone trading Irish bonds would not already know. The article has an alarming lack of concrete figures and seems to be based on "duirt bean liom go duirt bean lei" analysis. It is a nice article and neatly describes some of the issues we face but I do not think there is more than that to it.

  7. Seems to be a move from long term to short term bond investments. The 10 year yield has increased but the 1 and 2 year have fallen to 6.2 and 7.2 respectively. The yield curve is now sloping upwards or perhaps I looking through wishful eyes.