the bond market

geordief

Am trying to make sense of why it is that Ireland and now apparently Portugal are suffering in the bond market.
When I listen to commentaries on the BBC or SKY I get the 2 following explanations
1) The markets are not convinced by the policies set forward by the governments or by the Eurozone generally
2) they also say that the Bond Markets are ,like a wolf chasing a pack, targeting the weakest member in order to make a killing (ie making money out of a potential weak link )
So what is it ?
Are these bond dealers cynically creating a fatal weakness out of a potential weakness as a way of lining their pockets or are they just putting their bets in a rational (to them) way without any agenda of creating a run on a country?
Or is it both ? Do the 2 tendencies conflate with some bond dealers being happy to precipitate a country going bankrupt with others just happy to do their job and place their purchases in a more or less reasonable (even if at times unwelcome way)

Scofflaw

geordief wrote: »

Am trying to make sense of why it is that Ireland and now apparently Portugal are suffering in the bond market.
When I listen to commentaries on the BBC or SKY I get the 2 following explanations
1) The markets are not convinced by the policies set forward by the governments or by the Eurozone generally
2) they also say that the Bond Markets are ,like a wolf chasing a pack, targeting the weakest member in order to make a killing (ie making money out of a potential weak link )
So what is it ?
Are these bond dealers cynically creating a fatal weakness out of a potential weakness as a way of lining their pockets or are they just putting their bets in a rational (to them) way without any agenda of creating a run on a country?
Or is it both ? Do the 2 tendencies conflate with some bond dealers being happy to precipitate a country going bankrupt with others just happy to do their job and place their purchases in a more or less reasonable (even if at times unwelcome way)

Both, really. The financial markets operate in such a way that there is money to be made out of virtually any outcome. If the traders in general think that Ireland is a safe-ish bet, but with a chance of default, then they'll buy Irish debt at a reasonable markup above German debt. As the chance of an Irish default grows, that markup grows. Every time someone buys Irish debt, they're betting that Ireland won't default - the extra markup they're taking is to cover them against the risk that it will. The closer Ireland comes to defaulting, the fewer traders will buy Irish debt at all.

However, as the chance of an Irish default grows, it becomes reasonable to bet on Ireland defaulting instead of not defaulting. This bet operates as the reverse of the other - the closer Ireland gets to defaulting, the more traders will take this bet.

Those who have taken positions based on Ireland defaulting now have a vested interest in Ireland doing so - whereas the traders who have bought Irish debt have a vested interest in seeing that it doesn't.

Since traders are now regarded as a newsworthy source of market analysis, in the early days when default seems far away, any random trader is likely to have bet on Ireland not defaulting - which means they're likely to offer an analysis that suggests Ireland won't. As it becomes more possible that Ireland could default, any random trader becomes more likely to have bet on Ireland defaulting - which means that they're likely to offer an analysis that suggests Ireland will, or should, default. The same trader may originally have held a position based on betting Ireland won't default, but have got out of that and into a position based on betting Ireland will default.

The fact that the bond markets are pricing Irish debt as high-risk, and that many "market analysts" are now saying Ireland should default is, I'm sure, entirely coincidental.

cordially,
Scofflaw

geordief

thanks .It is very helpful.
I will have to reread it and digest it.
It makes me feel that economics puts chess analysis into the shade since for every realisation here comes a counter realisation -quite apart from the fact that we are dealing with extremely fast changing informational technology and balances of global economic power at the present time.
I did notice , though , that you seem to be saying that random traders were offfering analyses.
Would I be right to assume that anyone in the department of Finance would be seeking out impartial advice from people who didn't actually have a finger in the pie? Or are such people thin on the ground- a bit like ,say, of finding a jury in the OJ Simpson trial?

Bob_Latchford

geordief wrote: »

thanks .It is very helpful.
I will have to reread it and digest it.
It makes me feel that economics puts chess analysis into the shade since for every realisation here comes a counter realisation -quite apart from the fact that we are dealing with extremely fast changing informational technology and balances of global economic power at the present time.
I did notice , though , that you seem to be saying that random traders were offfering analyses.
Would I be right to assume that anyone in the department of Finance would be seeking out impartial advice from people who didn't actually have a finger in the pie? Or are such people thin on the ground- a bit like ,say, of finding a jury in the OJ Simpson trial?

(Im no expert, just trying to make sense of it)

I dont think its that complex in theory, its just risk and how to handle it. Think it gets complex in how practically you go about it.

Ideally they shoud be pretty neutral on Ireland defaulting. Win if they do, win if they dont. But to do that if risk increases of default they need to balance their books so that are still neutral, ie covering the price of default and this pushes momentum again.

DoF cant really offer advice only on what in their opinion the chances of default are, would imagine this hit the market pretty soon after

geordief

well I just started typing into Google to see what would happen when I started typing(you know the way Google now gives you an offering of searches -presumably because they are relevant or popular)
So I start with economics and then do a cha and there it is -economics chaos theory comes up as a search option.
I didn't know that chaos theory applied to economics -I was just testing (and I haven't read the results of that search).So I guess if it does apply then we are talking about something not very well understood which nevertheless might undermin what most of us imagine how economics works.
I remember back in the 70 s when we had the various economic crises that the thing that got repeated ,with some authority I think, was that absolutely no one understood what what going on.
Didn't Bush's top financial advisor (forget his name now)come up with that he was totally out of his depth on this latest one?
And wasn't he about as respected as they came?
Obviously it can't be right to just abandon economic forecasts but we seem at this moment in time to be just heading for one misunderstanding after another.I guess we should be grateful that this is going on in an era of great and still increasing wealth.
I wonder how the equations might change if global wealth went onto a long term decline