Friday, July 13, 2012

A Year of Bond Yields

It is now a year since the Irish government bond 9-year yield as calculated by Bloomberg peaked at 15.5%.  As of today it is just under 6.3%.

Bond Yields 1Y 13-07-12

The peak last July was the result of uncertainty in the run-up to the July 21st EU Summit.  There were strong rumours that Private Sector Involvement (PSI) and bond writedowns would be a feature of all bailout programmes.  Greek and Portuguese yields shot up similarly.

As it was, PSI was limited to Greece while Ireland and Portugal were ‘rewarded' with significant reductions in the interest rates on their EU loans.  Irish yields dropped precipitously in the weeks after the summit, in part driven by the decision to limit PSI to Greece and also because of purchases by the covered banks who used some of the recapitalisation money they received last summer to buy Irish government bonds.

This has proven to be a good investment for the banks.  The most recent Money and Banking Statistics from the Central Bank show that the covered banks holdings of Irish government bond are worth €16.3 billion.

The yields fell to around 8.5% by early September and stayed around there until Spanish  borrowing costs exploded in late November.  The Irish 9-year yield briefly threatened to return to the 10% mark, but the jump in late November was followed by a steady decline to 7% over the next two months.  This fall began a couple of weeks before the ECB launched its Long Term Refinancing Operations (LTRO) that provided close to €1 trillion to eurozone banks.

For the next three months the yield hardly budged from 7% before a step-up to 7.5% in mid-May following further Spanish uncertainty.  The announcement at EU summit on the 29th June last of possible direct bank recapitalisation by the ESM and the mention of some retrospective action in the case of Ireland saw the yield drop to 6.3% where it has been since.

One thing is clear over the year: changes in Irish government bonds yields have very little to do with domestic developments.  All the big changes over the past year have been driven by external or official events.  Economic data in Ireland has largely been moribund over the period with no discernible upward or downward pattern.

Uncertainty was of the biggest determinants of the yields.  Uncertainty about the size of the hole in the banks pushed Ireland out of bond markets and into an EU/IMF rescue programme.  Uncertainty about the possibility of PSI pushed the yields nearly 16% last July.

There is still a good deal of uncertainty: will the budget deficit continue to fall?  what do the recent EU statements mean for Ireland?  where will the growth come from?  We must wait to see what the answers will bring.  It will take some more ‘good news’ to bring the yields to 5% and lower which makes sustainable borrowing costs more likely.


  1. Hi Seamus, as of today we don't have a 9-year bond, it's now an 8-year! I suppose at some point the 2025 bond will become the benchmark.

    Here's the link to the 8-year

  2. Not very honest Seamus.

    The fall in yield is purely to do with ECB buying/printing of these bonds.

  3. @AL,

    The ECB's securities market programme has been in 'cold storage' since the start of March (see this comment elsewhere) and is unlikely to be reactivated.

    There is no doubt that the ECB has been buying Irish government bonds. The ECB don't provide figures by country but we do know that they have about €280 billion of "securities held for monetary policy purposes". Some guesses suggest that Irish government bonds make up around €20 billion of this. We have no way of knowing.

    The ECB's bond-buying programme bought Irish and Portugues government bonds, among others. In the time shown above Irish 9-year yields have gone from 15.5% to 6.5%, the Portuguese 10-year yield has gone from 12.5% to 10.5% (and the fall that to level has largely occurred since the SMP was deactivated).

    Why would the ECB's actions have such a big impact on just Irish yields?

  4. expectation of further purchases?

    local banks have been purchasing under the LTRO scheme?