Tuesday, August 14, 2012

Irish government bond yields

Bloomberg calculate a number of indicative yields for government bonds at different maturities.  For Ireland they currently provide 1-year, 2-year, 3-year, 5-year and 8-year yields.  The yield curve is upward sloping with the following yields (as of 15:45)

  • 1 year: 1.91%
  • 2 year: 2.74%
  • 3 year: 3.73%
  • 5 year: 5.38%
  • 8 year: 6.04%

Over the past month or so there has been a contrast in performance between those at the shorter end of the range (less than three years) and longer maturities.  This chart from Bloomberg compares the performance of the 2-year and 8-year yield relative to their positions 3 months ago.

2 v 8 bond yields

Both series dropped in the aftermath of the EU leaders summit of the 29th of June but since them the 8-year yield has been largely unchanged while the two year yield has continued to drop.  On the third of July the 8-year yield finished at 6.15%, only 11 basis points above where it is now.  On the same day the 2-year yield finished at 5.01% and has since fallen by 227 basis points. 

A look at the 3-year yield suggests that rates at back to somewhere near what could be considered “pre-crisis” levels (though there is an entirely different interest rate environment now).

Bond Yields 5Y 14-08-12

The three-year yield is based on a bond that matures in February 2015 and this is well outside the window of the EU/IMF funding programme.  Here are the three-year yields for most eurozone countries.

Ireland is firmly rooted in the first group but now has lower yields than both Spain and Italy, neither of which is in a bailout.  The differential between Ireland and Italy was covered in this recent piece on Bloomberg.

Irish Yields Fall Below Italy’s Ignoring Deficit: Euro Credit

By Gregory Viscusi - Jul 25, 2012

Ireland has been functioning thanks to rescue loans since 2010. The government has nationalized five banks and the country’s budget deficit will exceed 8 percent of output this year, European Union forecasts show.

In Italy, the budget shortfall will be 2 percent, less than the EU ceiling of 3 percent of the gross domestic product, and it hasn’t had to bail out its banks. Even with this economic backdrop, bond markets show investors have more confidence in Ireland than Italy.

Ireland has borrowed at preferential rates from its EU partners for the past 20 months, and market prices don’t reflect what it would pay if, like Italy, it had to fund itself in markets, said Guillaume Menuet, head of western European economic research at Citigroup Inc. in London.

Irish rates have fallen below those of Italy across much of the yield curve for the first time since 2009.

“Italy is getting the full brunt of contagion from Spain, and the markets are all playing the game of ‘who’s next?’,” said Cyril Regnat, a fixed-income strategist at Natixis in Paris. “Ireland has benefited from a positive news flow recently, but you still have to consider that markets are being a bit abnormal.”

There are lots of things that have been “abnormal” in the past few years.

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