Irish Government Bonds

noodler

Just a quick query, there is an auction today by NTMA for 5.0% Irish 10-year Government Bonds.

There was also one in March for 4.5% 10-year Government Bonds.

My question is, on which of these bonds is the regularly-reported media yield based?

Flamed Diving

This is a guess, but isn't the 5% a guide price? Give that it's an auction, it could go down to 4.5%, as it did in March?

Anonymous1987

Its a been a while since I looked at stuff like this but the 5% and 4.5% are the coupons i.e. the guaranteed fixed return on bonds. Once bonds are traded the price varies and has an inverse relation to the yield so as price goes down yield goes up. A quick look at US rates here provided by Bloomberg seems to suggest they just use the most recently issued bonds.

The %s you mentioned are coupons, as Anonymous says.

The yield is then calculated based on the coupon and the price. If you are interested I have some notes from college on how it is all calculated and if you are feeling brave, Investments by Cutherbertson and Nitzsche goes over it all in a readable (ish) manner.

noodler

I think I may have asked the question in a roundabout manner.

The IT website has, right as this moment, different yields for each of the bonds I mentioned above.

4.61% yield for the 4.5% Bond
4.73% for the 5.0% Bond

Now the current Irish Government yield for ten-year bonds is the 4.61% figure as reported in a variety of places. So I was just wondering what we can say after the sale of the 5.0% ones today by NTMA.

Maybe thats still unclear! I guess I can wait to see what is reported after the auction.

Anonymous1987

I think what they do is just use the most recently issued bond so after the sale the 5% bond will be used for calculating the yield, not 100% on it though. Could you post the link to the Irish bond data just out of interest for myself?

The bonds are separate, so they will have their own yield (as the maturities will be different from the ones already in the market).

The yields will be correlated in that the prices of all of the bonds are driven by the same fundamentals and there will be a price effect on the existing bonds if the 5% coupon is not offset by a longer date to maturity then then 4.5% paying bond.

Does that help?

Anonymous1987

Deleted User wrote: »

The bonds are separate, so they will have their own yield (as the maturities will be different from the ones already in the market).

Yeah but do the media only the report the most recently issued bond yield when they refer to the "yield"? For example in the case above will they use the 5% coupon bond to report the yield on 10 year bonds because it is the most recently issued 10 year bond?

Économiste Monétaire

They'll probably refer to the 10 year benchmark bond, which is the 4.5% coupon, if I recall correctly. The two bonds have different maturity dates, durations, etc. so they won't always be equal.

The IT is probably getting their yield numbers from this:
http://www.ntma.ie/GovernmentBonds/Daily_Bonds_Outstanding.pdf

Anonymous1987

Anonymous1987 wrote: »

Yeah but do the media only the report the most recently issued bond yield when they refer to the "yield"? For example in the case above will they use the 5% coupon bond to report the yield on 10 year bonds because it is the most recently issued 10 year bond?

Lazy reporting and presenting a complex issue in simple terms for lay people I guess. Its not like the IT has a great history of excellent economic reporting.

Anonymous1987

Économiste Monétaire wrote: »

They'll probably refer to the 10 year benchmark bond, which is the 4.5% coupon, if I recall correctly. The two bonds have different maturity dates, durations, etc. so they won't always be equal.

The IT is probably getting their yield numbers from this:
http://www.ntma.ie/GovernmentBonds/Daily_Bonds_Outstanding.pdf

Isn't the benchmark bond the most recently issued one though?

More specifically, the benchmark is the latest issue within a given maturity. For a comparison to be appropriate and useful, the benchmark and the bond being measured against it should have a comparable liquidity, issue size and coupon.

http://www.investopedia.com/terms/b/benchmarkbond.asp

EDIT: The IT will probably just switch to the most recent one later today or tomorrow.

Anonymous1987

On a side note I thought NAMA bonds were being lobbed into a dodgy special purpose vehicle separate to other government debt or is that just for the accounting figures?

Économiste Monétaire

Anonymous1987 wrote: »

Isn't the benchmark bond the most recently issued one though?


http://www.investopedia.com/terms/b/benchmarkbond.asp

EDIT: The IT will probably just switch to the most recent one later today or tomorrow.

It is. However, that was issued today, so news agencies were referring to the 4.5% benchmark bond. I doubt Irish news websites update their stories to the latest issuance, especially when the NTMA still has the 4.5% listed as the benchmark bond. They'll probably update that at the close of business today.

noodler

The fact nobody is talking about spreads in the news reports makes me think that the 5.0% isn't comparable to the German benchmark.

Économiste Monétaire

5% is the coupon, not the yield. The spread of 10Y Irish debt over the Bund is the same as it was about 8 months ago (140 basis points), and that's what news agencies report. Greece, on the other hand, is about 480 basis points above the Bund; they're paying about 2.6 times what Germany is paying.

noodler

Again I am not sure if I was clear.

However, the 10-year bonds sold in March were 4.5% (Coupon yes) 2020: They had a yield of 4.426 so a spread of about 1.26%

The ones sold yesterday were 4.5% (Coupon) 2020: They had a yield of 4.688%.
Can I say the spread is now 1.618%? (Bloomberg says German 10 years were 3.07% yesterday BUT I have no idea if the coupon on those was 4.5% or 5%.

Thats the crux of my original issue, no one in the media is reporting the spread in the papers today but they were doing it like wildfire the day or so after the sale in March.

Économiste Monétaire

The coupon doesn't matter (unless you want to talk about things like duration), just focus on the yield difference. Take the yield figure given on BB for both of them and take the YTM based on the closing price, not the auction. Looking at both figures from yesterday, it gives a spread of 1.466 percentage points.

noodler

Économiste Monétaire wrote: »

The coupon doesn't matter (unless you want to talk about things like duration), just focus on the yield difference. Take the yield figure given on BB for both of them and take the YTM based on the closing price, not the auction. Looking at both figures from yesterday, it gives a spread of 1.466 percentage points.

How did you arrive at that? The bond was sold at 4.688% and the German equivalent was 3.07% yesterday (according to Bloomberg).

4.688% - 3.07% = 1.618%?

Économiste Monétaire

Économiste Monétaire wrote: »

Take the yield figure given on BB for both of them

Économiste Monétaire wrote: »

take the YTM based on the closing price, not the auction.

.

noodler

Regarding the closing price I do no thinkthat is, IIRC, what the media did last time when the spreads were widely reported.

I am not too sure what you are saying regarding the taking both yield figures? What would the 6 year bond have to do with the spread of Irish 10-year Gov bonds over the German equivalent?

noodler

Closing price, rather than the auction? Okay, but that would surely in no way count for the 0.2% discrepancy we are coming up with here.

On the other point, why would the yield on the 6-year bonds be important when calculating the spread of Irish 10-year Gov bonds over the German equivalent?

EDIT: Sorry for the double, was having web problems.

Économiste Monétaire

Yield fluctuates daily, but if you're referencing the Bund figure from Bloomberg, do the same for the Irish 10Y. Where are you getting the 6 year idea from? I never mentioned 6 year debt.

noodler

Économiste Monétaire wrote: »

Take the yield figure given on BB for both of them and take the YTM based on the closing price, not the auction. Looking at both figures from yesterday, it gives a spread of 1.466 percentage points.

.

Économiste Monétaire

Both Germany and Ireland.

noodler

How on earth do you end up with a spread that is nearly 1.5 lower than mine, even if you were using closing figures?

Économiste Monétaire

http://www.bloomberg.com/apps/cbuilder?ticker1=GIGB10YR%3AIND

http://www.bloomberg.com/apps/cbuilder?ticker1=GDBR10%3AIND

First minus second. 1.466 percentage points = 146.6 basis points.

noodler

So you should never use the yield of the auction itslef when calculating the spread?

Is there a website which calculates the Irish spread automatically?

The IT site shows different yields for the 4.5% and 5.0% 2020 bonds so its hard to know which of them to use. I assume the yield Bloomberg uses is the 4.5%

Économiste Monétaire

If you're looking at the situation on an on-going basis, then I would use the BB figures. If you want to compare the results of auctions throughout the year, then the auction number is fine; just take into account a natural fluctuation in both series when looking at a snapshot in time. The bid-to-cover ratio is also an interesting number. I'm not aware of a site that does that for you, if you have access to something like Thomson Datastream you could download the two series and simply subtract one from the other.

noodler

Do you know if the German Benchmark on 10 year bonds refers to the yield on their 5.% or 4.5% version?

I am starting to think the this week's 5.0% auction can't be compared spread wise to the German one's like the 4.5% auction in March can.

PS: Thanks for sticking with the discussion this long - I am just suspicious not one paper compared the yield on Tuesday auction to the German bonds like they did in March (I challenge anyone to find me an article that did anyway).

Économiste Monétaire

Here's a quick fact sheet on German debt:

http://www.deutsche-finanzagentur.de/fileadmin/Material_Deutsche_Finanzagentur/PDF/Aktuelle_Informationen/bund_fact_sheet.pdf

With maturity dates:
http://www.deutsche-finanzagentur.de/fileadmin/Material_Deutsche_Finanzagentur/PDF/Aktuelle_Informationen/Ausstehende_Bunds_E.pdf

The coupon rate doesn't really matter, it's 3.25% for the benchmark Bund, but they have different maturity dates (by about 9 months). How much this contributes to the jump in spread, I don't know.