Bond auction: 6% on 8 year bonds.

SkepticOne

There was some talk about the high yields the past few days being due to low demand in advance of the bond auction, but this does not seem to have been the case to any great extent.

Bloomberg: Ireland Sells 1.5 Billion Euros in Debt as Borrowing Costs Rise

The auction today was “great” for investors and “horrible” for taxpayers and the government,” said Willem Buiter, Chief Economist at Citigroup Inc. in an interview today. “From a technical point it was highly successful, over five times oversubscribed,” he said.

RTE: €1.5bn in Govt bonds auctioned

The National Treasury Management Agency has raised €1.5bn worth of fresh borrowings in a successful but expensive auction. Markets have been especially hostile to Ireland in recent days and weeks over concerns about the country's ability to pay its bills.

Many commentators have described negative market sentiment towards Ireland as exaggerated and ridiculous.

Today was a crucial excursion for the National Treasury Management Agency into the debt markets given the level of adverse economic comment suffered by the country in recent days.

Laminations

The taxpayer has been bent over by this government, and investors are queuing up for a free ride. We are being fvcked by the bond markets because the government has portrayed us as an easy helpless slag

The auction today was “great” for investors and “horrible” for taxpayers and the government,”

ei.sdraob

Citigroup’s chief economist Willem Buiter said today’s bond auction today was “great” for investors and “horrible” for taxpayers and the Government.

“From a technical point it was highly successful, over five times oversubscribed,” he said.”

Mr. Buiter get’s this right. Any taxpayer should not view the oversubscription as anything but overpaying for the debt. Thank goodness it is only €1,500,000,000.

the bit in bold, now bend over some more

Laminations

If it was 5 times oversubscribed how did this demand not drive down the percentage yields? You'd imagine the people wiring up to buy government debt would be in some type of competition with each other?

ei.sdraob

Laminations wrote: »

If it was 5 times oversubscribed how did this demand not drive down the percentage yields? You'd imagine the people wiring up to buy government debt would be in some type of competition with each other?

My thoughts exactly

why is the drop for the 10year index (http://www.bloomberg.com/apps/quote?ticker=GIGB10YR:IND) only went from 6.45 to 6.27 ?

could it be because we only sold so little (1.5Billion), by little i mean relatively little! and investors know come next year we be going cap in hand for 20x that

Cookie_Monster

Laminations wrote: »

If it was 5 times oversubscribed how did this demand not drive down the percentage yields? Y

that's what I'd like to know. Is the point of auctioning the debt not to find the lowest bidder in this case. If there were 5 times over subscription someone surely must have been willing to accept a lower percentage?

hinault

Laminations wrote: »

If it was 5 times oversubscribed how did this demand not drive down the percentage yields? You'd imagine the people wiring up to buy government debt would be in some type of competition with each other?

Agreed.

You'd assume that NTMA would have been able to negotiate a less punitive rate of interest, given ahem this level of demand for our debt ahem.

Laminations

It's obvious to me that the oversubscription (the other bidders) is a bad and not a good thing as they were all obviously bidding higher so the majority see us worse off than this 6% figure actually reflects.

Cookie_Monster

Also why are we even issuing debt @ 6% and not borrowing from that EU fund that was setup, that's 5% isn't it?

hinault

Laminations wrote: »

It's obvious to me that the oversubscription (the other bidders) is a bad and not a good thing as they were all obviously bidding higher so the majority see us worse off than this 6% figure actually reflects.

Indeed.

We're prepared to pick up the entire tab for the banking coup d'etat - so the institutions loaning money to this State know that we will pick up the sovereign debt tab also.
That's why they're all clamouring to loan us money.
Sucker I think is the correct expression.

The Comical Ali Anglo cheerleaders here who supported the Anglo bailout will tell you will also tell you that we have to honour these debts too.:rolleyes::rolleyes:

Scarab80

Laminations wrote: »

It's obvious to me that the oversubscription (the other bidders) is a bad and not a good thing as they were all obviously bidding higher so the majority see us worse off than this 6% figure actually reflects.

Ciaran O'Hagan, who is a bond strategist with Soc Gen, is saying over on irisheconomy that the overbidding (discount on the auction yield as compared with the pre-auction secondary market yield) was the strongest ever seen an Irish bond. Typically you should see a higher yield / lower price in the auction as all of the extra paper lands into the market, that the opposite happened means that buyers were obviously staying out of the secondary market.

Not to say that the price paid wasn't horrendous, as it clearly was, but worth bearing in mind that the average cost of funding in 2010 was 4.7% which is the same rate achieved in 2009.

hinault

Scarab80 wrote: »

Ciaran O'Hagan, who is a bond strategist with Soc Gen, is saying over on irisheconomy that the overbidding (discount on the auction yield as compared with the pre-auction secondary market yield) was the strongest ever seen an Irish bond. Typically you should see a higher yield / lower price in the auction as all of the extra paper lands into the market, that the opposite happened means that buyers were obviously staying out of the secondary market.

Not to say that the price paid wasn't horrendous, as it clearly was, but worth bearing in mind that the average cost of funding in 2010 was 4.7% which is the same rate achieved in 2009.

I'd expect Ciaran O'Hagan to say that.

Scarab80

hinault wrote: »

I'd expect Ciaran O'Hagan to say that.

Is he wrong? It's not like it's an opinion.

Sticky_Fingers

I just done some very quick (probability wrong) back of the envelope calculations and we are paying an extra 100 million in interest at these prices then we would at the last auction, thats some ebb and flow.

** Assuming basic interest
Spread difference on 8 year bonds = 0.935% per year
1 billion bought = 74.8 million extra interest to be paid

Spread difference on 4 year bonds = 1.14% per year
500 million = 22.8 million extra interest to be paid

Total extra interest = 97.6 million

(I am open to correction on these numbers and the method I used)

I posted this in another thread and just want to run it pass the eggheads here to make sure that my numbers are correct (they seem a little large to me tbh). If incorrect could someone in the know work it out and tell me how much extra this has cost us, I'm sure most people would be interested to see an actual money value on all this gobbledygook.

ei.sdraob

Scarab80 wrote: »

means that buyers were obviously staying out of the secondary market..

with 300 pound gorilla called ECB dancing around and buying our crap in the secondary markets, is it any wonder?

hinault

Scarab80 wrote: »

Is he wrong? It's not like it's an opinion.

Let's be logical here for a second.

I have something to sell which is in great demand.
I should be able to negotiate a competitive price given that level of great demand, right?

We're told Ireland Inc has something to sell (debt) which in great demand.
You would assume that NTMA could get a more competitive (lower) rate of interest for that debt in these circumstances.
Instead the rate of interest has actually increased.

Scarab80

ei.sdraob wrote: »

with 300 pound gorilla called ECB dancing around and buying our crap in the secondary markets, is it any wonder?

If the ECB were buying up everything in the secondary market, that should mean that bonds are overpriced there. We saw the opposite today.

Looking at ECB statements, they have been buying up between 100 and 300 million a week across Europe, pretty small change given the turnover in the markets.

SkepticOne

Scarab80 wrote: »

Ciaran O'Hagan, who is a bond strategist with Soc Gen, is saying over on irisheconomy that the overbidding (discount on the auction yield as compared with the pre-auction secondary market yield) was the strongest ever seen an Irish bond. Typically you should see a higher yield / lower price in the auction as all of the extra paper lands into the market, that the opposite happened means that buyers were obviously staying out of the secondary market.

Not to say that the price paid wasn't horrendous, as it clearly was, but worth bearing in mind that the average cost of funding in 2010 was 4.7% which is the same rate achieved in 2009.

There was a decrease in yield and to a certain extent people were staying out of the market, but it is only in the last week or so that the 10 year bond went above 6% in the secondary market causing headlines and 6% is what the 8 year bond sold at.

At the end of the day as you point out, it is the price paid that is the important thing. Demand in the absence of price means nothing.

Scarab80

hinault wrote: »

Let's be logical here for a second.

I have something to sell which is in great demand.
I should be able to negotiate a competitive price given that level of great demand, right?

We're told Ireland Inc has something to sell (debt) which in great demand.
You would assume that NTMA could get a more competitive (lower) rate of interest for that debt in these circumstances.
Instead the rate of interest has actually increased.

He's not saying that the rate is good. He's saying that the result of the auction was good given the prevailing market price.

Obviously the problem is that at the moment there is not great demand for our bonds, this will have to be addressed before the next auction, it remains to be seen whether announcing a final cost for Anglo (if that can even be done) will affect prices. There is also NAMA quarterly accounts and GDP announcement due before the end of the month.

It's going to be an interesting couple of weeks.

Comordha

The buyers obviously knew that they could get away with a nice rate, that's why they were queing up. Some would have gotten a better rate than others but overall it shows that the current rate is here to say. If it continues at this rate we are in serious trouble. A lot of it is probably to do with speculators ganging up in a 'wolf pack' and saying hey lets take this bunch for a ride and extract nice interest from them for a while, while we can. This auction could have been skipped but the NTMA wants to keep the momentum going so as not to look worried or weak, but isin't this the same attitude that got us into this sh**heap in the first place when the banks were saying they were fine? If the rate keeps increasing the Govt will have to throw everything at the market, like what the EU did some weeks back. The most likely sweetner to the market would be liquidating the NPRV, not many other ways of calming the pack down as we've already used up most of our tricks.

hinault

Scarab80 wrote: »

He's not saying that the rate is good. He's saying that the result of the auction was good given the prevailing market price.

With respect, I don't expect Ciaran O'Hagan or others like O'Hagan to say say differently.
No doubt Societie General is a buyer of some of the bonds that this country sells during these auctions.

The fact of the matter is that we're paying extortionate levels of interest for debt.
That is the bottom line here.

hinault

Scarab80 wrote: »

Obviously the problem is that at the moment there is not great demand for our bonds,

Can you clarify what you mean?
You seem to suggest that demand for our bonds is weak?

It would appear that there was good demand for our bonds according to the RTE website "Bids for the four-year bond were oversubscribed by 5.1 times, while bids for the eight-year debt were 2.9 times the amount allocated"

Other commentators have also said that the demand for our bonds showed positive sentiment.

the_syco

Hrm. I wonder will these bonds go the way that the Eircom shares went?

SkepticOne

I disagree with a lot of the media commentary on the bond issue where they say it has been a success due to oversubscription. There has been a lot of media speculation about investors being worried about the findal cost of Anglo, there has been the downgrade by S&P and Ireland's response to it.

Then there has been the Cowen Morning Ireland debacle (though I don't think this was a major part of it).

While all this drives up the cost of Ireland's borrowing, it also attracts bidders to the auction and so this is what we have seen. A lot of risk takers made bids at high yields. It made no difference to the final price but is still counted as oversubscription.

Justin Collery

I'm AIB / Bank of Ireland / another other Irish bank.
I have an account with €0 in it.
I bid for, and get €1bn of the bonds at 6%.
My account now has -€1bn.
I hand these bonds over to the ECB as collateral for cash at a cost of 1%.
My account again has €0 in it

However I am now getting 6% from the Irish tax payer (€60m / year) and my cost is 1% to the ECB (€10m), a yearly €50m subsidy from the Irish tax payer.

The bank makes a couple of quid, the bond auction looks great as it's way over subscribed, and the wool is pulled over every ones eyes.

johnnyskeleton

SkepticOne wrote: »

There was some talk about the high yields the past few days being due to low demand in advance of the bond auction, but this does not seem to have been the case to any great extent.

Bloomberg: Ireland Sells 1.5 Billion Euros in Debt as Borrowing Costs Rise

RTE: €1.5bn in Govt bonds auctioned

It's very bad news. The yield on the 8 year bond has gone up by almost a full percentage point. The 4 year is worse, going up more than a full percentage point. And while the difference betwee 5% and 6% comparing one year to another is not so bad, this is a 1pp increase in the last 2 months (1 month in the case of the 4 year).

Cookie_Monster wrote: »

Also why are we even issuing debt @ 6% and not borrowing from that EU fund that was setup, that's 5% isn't it?

Good question. To save face mostly, but there may be some logic to doing so. It might be better to pay 6% on 1bn than to have a collapse of confidence on the other debt. However, more likely it is because taking the EU money would likely involve harser cuts.

hinault wrote: »

Let's be logical here for a second.

I have something to sell which is in great demand.
I should be able to negotiate a competitive price given that level of great demand, right?

We're told Ireland Inc has something to sell (debt) which in great demand.
You would assume that NTMA could get a more competitive (lower) rate of interest for that debt in these circumstances.
Instead the rate of interest has actually increased.

As explained above, that was the best offer available, the other bids having even higher yields.

The demand for Irish debt is only in great demand because it provides a much better return than most other soverign euro debt.

hinault

johnnyskeleton wrote: »

As explained above, that was the best offer available, the other bids having even higher yields.

The demand for Irish debt is only in great demand because it provides a much better return than most other soverign euro debt.

Yep, you'll get plenty of people who're prepared to loan you money, if you're prepared to pay and are able to pay extortionate rates of interest for that money.
That's the only reason that this auction was oversubscribed.

It's like saying the man who doesn't charge a fee for his labour will never be unemployed.

ei.sdraob

http://www.irisheconomy.ie/index.php/2010/09/22/how-yields-are-set-in-bond-auctions/

very good article above which will explain the concerns raised in this thread

Take the €1 billion euro 8-year bond that was issued yesterday. The interest rates that we pay on these bonds are determined in an auction. People submit private bids detailing how much of the debt they want to acquire and what rate they are willing to pay. NTMA want to pay the lowest interest rates possible, so they allocate the bonds to those offering to take the lowest interest rates until they have handed out the full €1 billion of bonds.

Yesterday’s auctions featured €2.9 billion in bids (this is what is meant by the bid-cover ratio being 2.9) and the widely-advertised rate of 6.046% was the highest rate offered that received a full allocation of debt. The business about the “heavy demand” relates to the fact there were €1.9 billion in bids from people who were not allocated bonds. Pretty clearly, however, the existence of these bids can’t lower the rate since these people weren’t willing to purchase the bonds at lower interest rates.

Also, we don’t know how serious all of these unsuccessful participants were. For all we know, some could have submitted bids at 10%: NTMA don’t release information about the nature of the unsuccessful bids. In the absence of this information, I’d recommend not reading too much into bid-cover ratios.

yeh basically there was interest but alot of it was at even higher rates :eek:

so next time you see a FF politician boasting about this throw a shoe in their face (or just do it anyways they deserve it), throw a sandal in case of Greens

johnnyskeleton

ei.sdraob wrote: »

http://www.irisheconomy.ie/index.php/2010/09/22/how-yields-are-set-in-bond-auctions/

very good article above which will explain the concerns raised in this thread

Surprised that Karl Whelan didn't differentiate between interest rate and yield.

dean21

hinault wrote: »

Agreed.

You'd assume that NTMA would have been able to negotiate a less punitive rate of interest, given ahem this level of demand for our debt ahem.

Because they know we need it and they will keep screwing us
I think the NTMA should have backed out of the sale as we have money till next June.
If things have not improved by then to bring down the borrowing cost then it will be the IMF all the way

Économiste Monétaire

johnnyskeleton wrote: »

Surprised that Karl Whelan didn't differentiate between interest rate and yield.

In what sense?

ashleey

jcollery wrote: »

I'm AIB / Bank of Ireland / another other Irish bank.
I have an account with €0 in it.
I bid for, and get €1bn of the bonds at 6%.
My account now has -€1bn.
I hand these bonds over to the ECB as collateral for cash at a cost of 1%.
My account again has €0 in it

However I am now getting 6% from the Irish tax payer (€60m / year) and my cost is 1% to the ECB (€10m), a yearly €50m subsidy from the Irish tax payer.

The bank makes a couple of quid, the bond auction looks great as it's way over subscribed, and the wool is pulled over every ones eyes.

Now you know why the ecb bailout fund exists. If Ireland default then the banks that are round tripping the ecb will go down with the ecb.

ashleey

The idea of the ecb special measures was to allow the banks to gradually reduce risk. Instead they are doubling up. It's a mess and guess who is paying?

lmimmfn

where can we but these bonds?

johnnyskeleton

Économiste Monétaire wrote: »

In what sense?

The interest rate (coupon) for the bonds were 4% and 4.5% respectively. In the quoted piece he refers to the yield (6.046% on 8 year) as the interest rate.

Économiste Monétaire

johnnyskeleton wrote: »

The interest rate (coupon) for the bonds were 4% and 4.5% respectively. In the quoted piece he refers to the yield (6.046% on 8 year) as the interest rate.

It's the interest rate based on the auction price. It's like quoting the interest rate on Treasury bills, which have no coupon, you just give the yield. I suppose people should just say coupon or yield, to stop confusion. I thought you were referring to convexity or something.