20/2/2013: Hungary's 'Return' to Bond Markets

Week ago, Friday, Hungary was downgrade to junk. This Tuesday, despite its newly-minted junk bond status from all three core agencies (Ba1/BB/BB+) Hungary went to the market with a plan to raise USD3bn worth of US Dollar-denominated bonds. 

Now, unlike Ireland, Hungary is NOT in the 'best-of-class' league in Europe when it comes to compliance with the Troika demands and in general. After all, Hungary went on to aggressively interfere with its Central Bank independence, broke off negotiations with the IMF on second 'rescue' package back in November 2012, and basically replaced the Governor of the Central Bank with dovish Monetary Council. The country economy is still in a tailspin based on IMF figures*, although its fiscal performance, external balance and unemployment are healthier than those of the 'best-in-class' country - Ireland: 

-- Hungarian GDP is estimated by the IMF to have fallen by -1.021% in 2012 (against Ireland's estimated increase of +0.353%), with 2013 forecast for a rise in Hungarian GDP of just 0.797% in real terms (Ireland's same period forecast is for a rise of 1.394%).

-- Hungary's unemployment rate is barely budging off the crisis high (11.243% in 2010 to 10.925% in 2012). Ireland's unemployment rate is at the crisis period high with 2012 estimate at 14.7-14.8% and expected to decline marginally to 14.41% in 2014.

-- Hungary's General Government Revenues are shrinking faster than the economy. In 2011, Hungary's Government collected 52.864% of GDP in revenues, which has fallen to 45.787 in 2012 and is expected to shrink to 45.054% in 2013. In the mean time, Ireland's Government Revenues are marginally up from 34.118% in 2011 to expected 34.542% in 2013.

-- General Government Total Expenditure in Hungary is slowly inching up: from 48.672% in 2011 to forecast 48.761% in 2013, against Ireland's contraction from 46.869% in 2011 to 42.065% projected for 2013.

-- General government net lending/borrowing in Hungary stood at a deficit of -2.909% of GDP in 2012 and is forecast to rise to -3.707% in 2013. This compares with the completely abysmal Irish performance at 8.301% GDP in 2012 to 7.523% in 2013 forecast.

-- Hungary's primary deficits are expected to be less than 1/2 of those of Ireland in 2013.

-- Hungary's Government debt is sitting at 74.2% of GDP forecast for 2013, down from 80.6% in 2011, while Ireland's debt is up from 106.5% in 2011 to 119.3% projected for 2013.

-- The Government is aiming to repay the IMF and EU of €3.65bn and €2.31bn in 2013, against Ireland's nil repayments.

-- Hungary's current account balances have been in excess of that for Ireland since 2009, although 2013 forecast is for the current account surplus of 2.69% in Hungary vs 2.71% in Ireland.

*Note: I am using WEO data for the comparatives, instead of individual countries assessments, so some of the data cited is slightly off the latests projections, although the actual comparatives are hardly off by much

In other words, Hungary is clearly more of a sovereign policy, economic environment and monetary policy risk to the investors than Ireland. And despite this, Hungarian Government 10-year bonds have fallen in terms of yields from 5.8% in August 2012 to around 4.7% currently.

And last Tuesday, Hungary has managed to place USD3.25billion worth of new 5- and 10-year bonds with the cover ratio at 12.5-to-3.25. Overall, Hungary had offers for USD5.5bn worth of 4.25% 2018 bond with USD1.25bn allocated, these were priced at 335bps over US Treasuries and 320bps over mid-swap bang on with where the 10-years (2011s) were traded in the secondary market. Last time it sold 10-year bonds back in 2011, these were priced at coupon of 6.375% or full 100bps above the current deal. It also booked USD7 billion book for 5.375% 2023 bond with USD2bn allocated, priced at 345bps over US Treasuries and 336bps over mid-swaps.

Hungarian Government planned to raise some USD4bn worth of bonds in 2013 in total and is now 81% at its target for the year. Geographic allocation of the placement was even more encouraging: US investors took 55% of the 10-year paper, UK and Europe investors took 21% each. Funds took 81%, hedge funds took 9% and banks and retail investors only 5%. The 5-year allocation was similarly spread.

All of this suggests that the markets have little interest, currently, in the underlying risk fundamentals. Instead, pretty much anything offering a yield above the G7 average is simply seen as a target worthy of consideration. While Governments are quick to show up at the sales announcements with proclamations of their policies successes, the reality of the market awash in liquidity and nothing to chase in terms of yield means that investors are rushing into the issues pushed through by the economies that hardly in rude health today or can be expected to return to such a state any time soon. 

3/7/2012: Curb your enthusiasms?

So, the NTMA have issued a (welcome) note that Ireland is to resume auctions of T-bills. The note states that "on Thursday 5 July 2012. The NTMA will offer €500 million of Treasury Bills with a three-month maturity in its first such auction since September 2010." 

The details of the auction on 5 July are as follows: 

• Auction size: €500 million. 

• Maturity: 15 October 2012. 

• Auction opens: 9:30 a.m. 

• Auction closes: 10:30 a.m. 

• Settlement date: 9 July 2012. 

This is potentially (pending results of sale, namely yield, volume and percentage allocation to non-captive banks and funds) a minor positive for Ireland. Minor, because:

1. Bills are NOT bonds - bills are short-term instruments, traditionally under 12 months maturity (bonds are over 1 year maturity).
2. Bills issued currently fall to mature within the period of existent EFSF funding programme, so in effect there will always be funds to cover these, short of a catastrophic collapse of the euro during the duration of the bills.
3. Issuance of bills has nothing to do in terms of signaling the state of public finances health or economic conditions health of the issuer, as both Greece (see here) and Portugal (here) have issued these during their tenure in the rescue programmes.
4. Portugal issuance (linked above) covered 18-mos bills, which would constitute a stronger positive signal than that of planned Irish sale, if there was any whatsoever informational content to these auctions.
5. Ireland has issued T-bills back in September 2010, and then it was NOT a signal of any confidence in Ireland's financial health.

The media statements that this sale shows that 'Ireland is back to bond markets' is fully incorrect. T-bills market is not the same as bond market. And T-bill instruments are distinct from the bonds. For example, T-bills were not covered by PSI default in Greece, unlike bonds.

Funding public spending via T-Bills is a (marginally?) riskier undertaking for the Exchequer because it implies transfer of any potential maturity mismatch risk onto the Exchequer. Maturity mismatch risk arises when the Government uses short-term debt to finance longer-term spending commitments.

So what is the 'positive' then in NTMA news? For now - just a hope we do not get a complete rejection (which is highly unlikely, as NTMA has primed the market already). We need to see results of the auction to tell if things are positive or not - e.g. how high is the demand from outside Ireland? how expensive is the funding obtained compared to secondary bonds markets on shorter maturity end? etc.

H/T for some of the above to: Prof Karl Whelan, Prof Brian M Lucey, Owen Callan (Danske Markets)

Update:  There is a nagging question begs asking - why does Ireland need T-bill? Portugal and Greece might have used T-Bills to manage expenditure in the interim of disbursals of EFSF funds, which, especially for Greece this year, have been uncertain. Ireland is fully compliant with Troika requirements and is getting its money on schedule, with no uncertainty. In effect, therefore, either we are facing a shortfall on funding within the programme (unlikely in my view) or we are using T-bills (more expensive money raising) to finance that which we can finance at cheaper rates via Troika funds. The latter option is double-daft as the repayment of T-bills will be done out of the same Troika money. In this latter case, of course, the motivation can be to simply 'generate feel-good news' by the Government that 'Ireland is back to the (bond) markets'...