Economics 21/9/10: This Little PIIGSy Went to the Market

So here we go again: NTMA went to the market, ECB came along, the results are suspiciously identical (save for obviously increased costs of borrowing) to those achieved in August.

We sold €500 million of 4 year debt due in 2014 at an average yield of 4.767%, compared with 3.627 percent at the previous auction on August 17. Cover on 4 year paper was We also sold €1 billion wort of 8 year paper due in 2018 a yield of 6.023%, up from 5.088% in a June sale.

Short term stuff first:
Cover support is clearly running well above average/trend, indicating potential engagement by the ECB. Price spread is down, suggesting that the yields achieved are reflective in the perceptions compression on behalf of bidders, which in turn might mean that the markets are getting more comfortable with higher risk pricing of Irish bonds.

Next up: yields and prices achieved:
The dynamics are crystal clear - we are heading for a new territory in terms of elevated yields and lower prices. Actually, setting historical record in both, despite likely ECB interventions.

Weighted average accepted price:
Boom! The curve is getting curvier.

On to longer term stuff:
Yield spread down as well - same reason - higher yields are now a 'normal' for the markets as average accepted yield shot up.
Cover slightly up, perhaps being pushed by the bidders flowing from the shorter term paper - crowded out by Jean Claude Trichet's boys. Price spread is down (see yield spread discussion above).

Predictably, longer-term accepted average price is testing historical lows:
Boom, redux!

And the maturity profile of debt is getting steeper for the folks who'll take over the Government in the next round, and our teenagers (that'll teach'em a lesson, for those, of course who'll stay on these shores):

Economics 23/8/10: ECB & IRL bonds

Per report today: "FRANKFURT, Aug 23 (Reuters) - The ECB said on Monday it bought and settled €338mln worth of bonds last week, the highest amount since early July and bolstering recent market talk it had ramped up purchases of Irish bonds. The amount is well above €10mln of purchases settled the previous week... It follows recent comments by market participants that the ECB bought 60 million euros of 2012 Irish government bonds just over a week ago, after spreads over German Bunds ballooned. The ECB has not given any details of its bond buying."

I speculated after last auction results were announced by the NTMA that extraordinary level of cover (x5.4) on 4 year bonds issue looked strange and that ECB buying might be the case. To remind you - NTMA sold €500mln of 4-year bonds. It now appears that the ECB did indeed engage in potentially substantial buying of Irish bonds. If so, such buying cold have

1. pushed other purchasers out of the shorter term paper into 10 year bonds; and/or
2. pushed yields on both shorter and longer term paper down.

€338mln figure includes trades executed between August 12 and August 14 - the auction of shorter term paper that is known to have involved ECB buying.

All in, we are clearly now in the yields zone where the markets are happy to watch us lean on ECB, the ECB is happy to watch us skip one-legged across budgetary deficit that keeps opening up wider and wider. Clearly, such an equilibrium is unlikely to be stable. Expect some fireworks once markets come back to full swing a week from now.

Economics 18/8/10: NTMA's foray into bond markets wilderness

As promised - a more in-depth analysis of today's data from NTMA auction.

"The Gruffalo said that no gruffalo should
Ever set foot
In the deep dark wood"

Clearly, bent on saving nation's face, the NTMA could not pass on going to the markets today.

First, let us take a look at the changes in averages from April 2009 first auction through today, against the same averages for the period excluding today's auction.
So today’s auctions have led to:

• a small increase in overall maturity profile of Irish debt (good news)
• a small increase in average coupon paid for all maturities (true future liabilities on debt)
• a modest rise in average cover (potentially due to massive overbidding by ECB, but this is a speculative remark at this moment in time)
• a drop in average price paid and a corresponding rise in the weighted average yield.

These effects were most discernible in the benchmark 10 year bonds issue, where:

• Average coupon rose by ca ½ basis point;
• Average cover dropped
• Weighted average price declined and weighted average yield rose (the latter by almost 0.7%)
• Average allocation amount rose.
  

Even more interesting stats are in the price and yield spreads:
Again, for across all issues averages spreads in prices rose significantly – by 8.3% and spreads in yields rose 7.85%. This is on the back of 10 year paper alone, suggesting the following two things:

1. Whatever was happening in the shorter term paper market (cover and lower yields) appears to be disconnected from what was going on in longer term paper markets (perhaps the rumoured ECB intervention on the shorter side was after all true?);
2. Since the prices and yields reflect bids by market makers – the widening of the spreads between max and min bids might be indicative of the markets inability to tightly price Irish sovereign risk. In other words, this might signal general markets uneasiness about the bonds.
   

Some charts illustrate more general trends.

Short term paper auctions first (5 years and less):
Average yield is still on the rising trend despite a clearly 'extraordinary' move down in today's auction. Even steeper upward trend for November 2009-present is still present. Yield spreads are on the upward move again once more signaling potential rise in overall market skepticism.
Price spread trends up predictably in line with yield spread trend. To see it in absolute terms:
Weighted average price achieved in the auctions:
Again, if ECB speculations play out to be true, the small uptick in price in last auction can be written off completely.

Now to longer maturity (10 years and above).
Average yield down, but still above long term trend. Yield spreads up, quite significantly. As I mentioned in the earlier post, latest auction produced yield spreads of 9.9bps - third highest spread since April 2009.
Price spreads are 75bps - second highest spread since April 2009. Cover down - lowest since February 2009 and is down year on year. Again, to highlight spreads in real terms:
Next, look at the price achieved:
This hardly constitutes any sort of 'success'. May be, just may be - some sort of a stabilization, with mean reversion still incomplete.

Now to the maturity profile of our debt:
We keep on loading the 2014 end of the spectrum - bang on for the year when we are supposed to reach 3% deficit. Of course, with already close to €5 billion in rollovers due in 2014, it's hard to imagine how this is going to help our fiscal position.

Economics 17/8/10: Another 'success' marks NTMA's foray into bond markets wilderness

Wall Street Journal blogs have beat me to the analysis of our NTMA results. Four reasons can explain this blogs tardiness:

1. I was doing Drivetime commentary on the results at 5:15pm today;
2. I was finishing my article on the topic for the Irish Examiner tomorrow;
3. Call of work duty had shifted me firmly for a few hours into a beautiful world of international macro data (oh, the place where there are no Anglos and INBSs... at least not after FDIC gone through their equivalents with a sledge hammer);
4. Last, but not least, my son gave me an even more important task of playing with him Garda and Helicopter rescue of a Big Black Spider.

To atone for this, this post precludes my deeper analysis of today' NTMA results. This post is a verbatim reply to Wall Street Journal blog post (linked here).

"Dear Richard,

I appreciate the short-term analysis span you deployed in your article on the latest Irish bonds auction.

However, several points worth raising in relation to the claimed 'success' of today's
NTMA placement.

1. the auction achieved price bid spreads of 75bps - 2nd highest in the last 2 years, suggesting that 'success' was based on a rather less consensus-driven pricing with market makers (traditionally most stable pricing players in the market) having shown significant differences in their ability to price Irish sovereign risk;
2. the weighted average yield achieved was the 3rd highest over the entire 2009-2010 period of issuance of 10 year bonds; and
3. cover achieved in 10 year paper auction was lower than a year ago (down to 2.4 from 2.7)
   

However, it is the longer term issues, that are certainly worth highlighting.

These involve the fact that even under Government own projections, factoring in expected Nama losses forecast by independent analysts, such as myself, Peter Mathews, Prof Brian Lucey and Prof Karl Whelan, by 2012 Ireland will be carrying over 210 billion worth of state (sovereign and quasi-sovereign) debt on its books. At 5.386% yield, this translates into ca €11.31 billion in interest payments alone or more than 1/3 of the entire tax revenue collected by the Irish Government in 2009.

It is naive to believe that 2010 gargantuan deficit in excess of 20% of GDP is a 'one-off' reflection of banks recapitalizations demand.

Again, based on balance sheet analysis, I expect 6 banks covered by the State Guarantee to incur loans losses of ca €50 billion between 2008 and 2012. Current provisions announced by the Irish Government and the banks cover roughly a half of these. The rest will have to be financed out of taxpayers funds in years to come.

In a taste of things ahead, earlier today Governor of the Central Bank has stated that next stage
recapitalization of Irish Nationwide and EBS building societies will cost taxpayers not €3.5 billion earlier factored in by the Minister for Finance, but €4 billion. €500 mln discrepancy within 5 months is a pittance for the Exchequer burning deficits at 20% of GDP (or roughly a quarter of the real domestic economy), but... Independent estimates put the final figure at €7 billion.

So much for the 'one-off measures'.

Perhaps the most telling sign of what is really happening in the markets NTMA tapped today is the fact that having dropped 20bps, Irish bonds spreads over German 10-year bund have risen once again to within a hair of 300bps.

Some success, then..."

In addition, one can only speculate whether the 'spectacularly' large cover of 5.4 for shorter term 4 year paper is due to the much speculated about, but yet to be confirmed or denied, direct buying by the ECB. If so, then we might have a situation where ECB gross over-bidding in the shorter maturity paper placement drove buyers into longer term paper. this, in turn would imply that neither the 3.627% weighted average yield achieved in 4 year bonds nor the 5.386% average yield priced in 10 year bonds are to be trusted as market benchmarks.


A more detailed analysis of the bonds issuance follows in the next post, so stay tuned.

Economics 22/7/10: Irish bonds auctions - a Pyrrhic victory?

“Despite Moody’s downgrade on Ireland’s credit rating on Monday, the NTMA successfully borrowed €1.5bn yesterday. Yesterday’s auction showed increased demand from investors for Irish debt and now means that the NTMA has completed 90% of its 2010 long-term borrowing programme.”

That was the swan song from one of Irish stock brokerages.

Lex column in the FT was far less upbeat, saying Ireland “offers a not terribly encouraging example of how difficult it is to overcome a massive debt binge.”

NTMA might have pre-borrowed 90% of this year’s €20bn borrowing target . But two things are coming to mind when one hears this ‘bullish’ statement.

Firstly, the €20bn is a target, not the hard requirement. If banks come for more cash, Brian Lenihan will have to get more bonds printed.

Secondly, Irish spread over German bunds is now higher than it was at the peak of the crisis in early 2009.

Want see some pictures illustrating Irish borrowing ‘success story’?

Let us start on the shorter end of maturity spectrum – 5 years and under:

Chart 1Average yields are trending up over the entire crisis term and are soudly above their entire crisis trend line since June. More significantly, the trend is now broken. As yields declined in 2009, hitting bottom in October, since then, they have posted a firm reversion up and once again, June and July auctions came at yields above those for this dramatic sub-trend.

Worse than that – in complete refutation of ‘improved demand’ claim by the brokers – yield spreads are now elevated. This spread – the difference between highest yield allocated and lowest yield allocated – suggests that markets are having trouble calmly pricing Irish bonds issues. Success or psychosis?

Chart 2 below illustrates the same happening in terms of price spreads.

Chart 2Auctions cover for shorter term paper is still below the long term trend line, although the line is positively sloped.

Chart 3Chart 3 above shows just how dramatic was the price decline and yields rise in Q2 2010 and how this is continued to be the case in July.

Chart 4Chart 4 gives a snapshot on pricing.

Next, move on to longer term bonds (10 years and over). There has been only one issue of 15 year bonds, so it is clear that the NTMA is simply unwilling to currently issue anything above 10 year horizon because of prohibitive yields.

Chart 5Chart 5 above shows upward trend in yields and July relative underperformance compared to longer term trends. It also shows yield spreads – again posting some pretty impressive volatility in June and bang-on long-term average (or crisis-average) performance in July. If that’s the ‘good news’ I should join a circus.

Chart 6Weighted average price is not changing much over the crisis period, so no improvement is happening here. In fact, since May it is trending down below the long term trend line, suggesting significant and persistent deterioration. Cover is on the up-trending line, but came in below the trend in June and July.

Chart 7 below shows more details on max and min prices and yields.

Chart 7Chart 8Chart 8 above clearly shows how average price is now in the new sub0trend pattern since November 09 price peak. May-July prices achieved are clearly below long term trend line and even more importantly – below the sub-trend line.

Finally, chart 9 shows the maturity profile of auctioned bonds:

Chart 9Notice how before the 2014 deadline, the Exchequer is facing the need to roll over €6,381 million in bonds issued during the 2009-present auctions. If Ireland Inc were to issue more 3-year bonds, that number will rise. That should put some nasty spanners into Irish deficits-reduction machine. But hey, what’s to worry about – our kids will have to roll over some €21,264 million worth of our debts (and rising), assuming the Bearded Ones of Siptu/Ictu & Co don’t get their way into borrowing even more.

Let us summarize the ‘success story’ that our brokerage houses are keen on repeating:

Table 1In other words, we are now worse off in terms of the cost of borrowing than in January 2010 – despite the ‘target’ for new issuance remaining the same throughout the period. We are even worse off now than at the peak of the crisis in March-April 2009 in short-term borrowing costs, although, courtesy of the German bund performance since then, we are only slightly better off in terms of longer maturity borrowings.

The compression in yield term structure delivered in June-July this year is worrisome as well. It suggests that the markets are not willing to assume that Irish Government longer term position is that much different from its shorter term prospects.

So on the net, then, what 'success' are our stock brokers talking about then? The success, of course is that NTMA was able to get someone pick up the phone and place an order, at pretty much any price? Next time, they should try selling pizzas alongside the bonds - the cover might rise again and they might convince the Eurostat that pizza delivery services are not part of the public deficit...