Irish Two-Year Bond Rate Moves Above Ten-Year

fred252

from Karl Whelan yesterday;

http://www.irisheconomy.ie/index.php/2011/03/22/inversion-two-year-bond-rate-moves-above-ten-year/

does this mean that investors believe we're likely to default sooner rather than later?

SBWife

Normally the yield curve inverts when bond investors expect short-term interest rates to fall. They are willing to hold long-term bonds, despite the lower current yield, because they are locking in the yield. In other words, current long rates reflect both current short rates and expected future short rates. When investors expect a significant decline in short rates, long rates will be below current short rates.

later12

No it doesn't mean that Ireland is about to default soon.

It is likely a reflection of European uncertainty; one of the most interesting aspects of the uncertainty at the core of Europe both in terms of "burden sharing" and restructuring of debt as well as reform of the European crisis mechanism, is that Ireland is the receptor for signalling investor flux on the Eiropean sovereign bond markets. When they're investing, we really feel it; when they're dropping off, we really feel it too.

Don't ask me why that is, but it is.

Scofflaw

SBWife wrote: »

Normally the yield curve inverts when bond investors expect short-term interest rates to fall. They are willing to hold long-term bonds, despite the lower current yield, because they are locking in the yield. In other words, current long rates reflect both current short rates and expected future short rates. When investors expect a significant decline in short rates, long rates will be below current short rates.

Or, to put it another way, investors expect things to be bad in the next couple of years in Ireland, but improving over the longer term - inverted curves are usually an indicator of impending recession, but this may not be the applicable in this case. Trying to explain every movement of Irish bonds at the moment is a bit like trying to explain every click of a Geiger counter.

cordially,
Scofflaw

fred252

Scofflaw wrote: »

Or, to put it another way, investors expect things to be bad in the next couple of years in Ireland, but improving over the longer term - inverted curves are usually an indicator of impending recession, but this may not be the applicable in this case. Trying to explain every movement of Irish bonds at the moment is a bit like trying to explain every click of a Geiger counter.

cordially,
Scofflaw

and by "bad" i thought it meant they expected some form of default/burden sharing/debt restructuring - are investors not likely to be making such assumptions?

Scofflaw

fred252 wrote: »

and by "bad" i thought it meant they expected some form of default/burden sharing/debt restructuring - are investors not likely to be making such assumptions?

Quite possibly - it's interesting that the two-year window is just beginning to tip into the likely date (2013) of the creation of a permanent European Stability Fund that replaces the EFSF arrangement we're currently borrowing from. If the intention is that our borrowing rolls over into the permanent fund from the EFSF - a big if, but not impossible - then the fact that the permanent mechanism is known to involve burden-sharing as a written-in possibility might just be weighing on investor's minds.

Or not, of course - they may just feel that default, if it's going to happen, is going to happen sooner rather than later.

cordially,
Scofflaw