Economics 12/06/2009: NTMA gamble

My apologies for staying off the blog posts for some time now - travel and compressed number of commitments this week have kept me with no time for blogging. Hopefully, this brief interlude is now over.

Per NTMA release:
"Irish Government Bond Auction on Tuesday 16 June 2009
The Irish National Treasury Management Agency (NTMA) announces that it will hold an auction of Irish Government bonds on Tuesday next 16 June, closing at 10.00 a.m.
Two bonds will be offered in the auction –
3.9% Treasury Bond 2012
4.6% Treasury Bond 2016
The overall total amount of the two bonds to be auctioned will be in the range of €750 million to €1 billion."

This is clearly a gamble on the 2016 bond and another tranche of medium term borrowing for 2012 issues.

Two problems continue to plague NTMA in my view:

Problem 1: issuance of bonds maturing prior to the magic 2013 deadline is threatening to derail the fiscal adjustments promised to the EU Commission, as these bonds will have to be rolled over into new issues and, potentially, at a higher yield. This also relates to the problem faced by the buyers of these bonds, as prices are likely to be depressed further should interest rates environment change.

Problem 2: signaling via maturity suggests that we are in trouble. If the state cannot issue credible 10+ year bonds, what does this say about the markets perception of the quality of our finances?

The bet NTMA are entering with the 7-year bond is that healthy results in the latest US Treasuries auction for 30-year paper yesterday will translate into a general bond markets demand improving.

Here are the combined results for the entire H1 2009 to date in issuance of bonds... not that NTMA would bother to put these in an Excel file for all to use...

First long-term:
Telling us that longer term bonds cover is at risk of being thin again (2.7 in March, down to 1.1 in April and up to 1.8 in May). Effective yields are rising: March issue at 4.5 coupon yields 5.81%, then down to April issue at 4.5 coupon yielding 5.08%, and up to May issue at 4.40 coupon and 5.19% yield. Next one will have 4.60 coupon and at what effective yield?

Plus notice how, with exception of one bond placement, all issues have gone past 2013. This means that offering another 2012 maturity bond next week is a sign of growing concerns for NTMA.

Short-term: a sea of borrowings here:
Covers are getting healthier, spreads on yields are shrinking and maximum allocated yields are starting to notch up again. What does it mean? Short-term money is relatively abundant and so covers should not be a problem for any non-junk paper, but the markets pricing spreads are getting tighter, more compressed to the higher yield range.
One more comment - both OECD and IMF have warned the governments not to succumb to a temptation to issue short term paper as refinancing it will bear a risk of higher yields. Guess what - based on the evidence above - is our Exchequer doing? H1 2009 issues to date:

• paper maturing in or before 2013: €12,157mln
• paper maturing after 2013: €2,978mln

Nothing more to say...