10 Year Bond Sold at 2.97%

omicron

Link

The National Treasury Management Agency made a successful return to regular bond auctions today.

It sold €1 billion of ten-year paper in its first such tender since their suspension three-and-a-half years ago ahead of an EU/IMF bailout.

After ten-year yields fell to a record low of 3.1% yesterday, compared with a 2011 peak above 15%, the NTMA sold today's bond at 2.967%. It had aimed to sell €1 billion.

Does anyone have any idea why bond yields are lower now when the economy is still doing relatively badly than they have ever been before? (especially with todays news of GDP falling in 2013 and the return of deflation).

I would have thought Irish debt would have been more attractive around 2005 than it is now but it seems investors are more interested in it now than they were then.

Great news - the headline on rte.ie annoys me though 2.967% rounds up to 3% not down to 2.9%

Geuze

omicron wrote: »

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Does anyone have any idea why bond yields are lower now when the economy is still doing relatively badly than they have ever been before? (especially with todays news of GDP falling in 2013 and the return of deflation).

It is a bit of a mystery how a Govt with a huge debt of 200bn, and with a fiscal deficit of maybe 7bn this year, in a country with low growth and high unemployment, can borrow at 3%.

The bond markets obviously fully believe in our "recovery" story.

Also, they are chasing yield.

Godge

Geuze wrote: »

It is a bit of a mystery how a Govt with a huge debt of 200bn, and with a fiscal deficit of maybe 7bn this year, in a country with low growth and high unemployment, can borrow at 3%.

The bond markets obviously fully believe in our "recovery" story.

Also, they are chasing yield.

http://www.rte.ie/news/business/2014/0313/601999-cso-gdp-figures/

The devil is in the detail of the figures. I pointed out sometime last year on here that GDP was going to lag GNP for some time because of the patents cliff. Essentially, once a patent runs out, a pharmaceutical company stops making super-profits. It might even increases sales volume and jobs, pushing up tax revenue but the revenue accruing to patents will fall.

At the macro level, say the pharmaceutical industry in Ireland sees a 20% fall in turnover because of patent income decreasing, this will show up as a fall in exports and a fall in GDP, even though the actual amount of activity is the same. As patent income is rarely kept in Ireland and is moved abroad through transfer pricing, the effect on the real economy is very small.

That is why the GNP, tax revenue, budget deficit and the labour force figures are more interesting. In that article it is stated that GNP grew by 3.4% last year, a phenonemal figure for the current world economy, in line with the labour force. Tax revenues also rose - if you remember the end-of-year returns, they were ahead of expectations. Those are the type of things that the bond buyers are looking at and they all point to an economy which can grow in the next few years and generate enough growth and tax revenue to ensure that the debt does not spiral out of control.

Geuze

Yes, that GNP growth rate is surprisingly strong.

Plus employment is growing at 3.3%

Public debt is still huge, though.

smcgiff

With that said, it seems out of step with our agency ratings. I suppose there are few 3A countries left, but we're just hovering about junk status at best.

Chasing Yield seems as good an explanation as any.

carpejugulum

Geuze wrote: »

It is a bit of a mystery how a Govt with a huge debt of 200bn, and with a fiscal deficit of maybe 7bn this year, in a country with low growth and high unemployment, can borrow at 3%.

The bond markets obviously fully believe in our "recovery" story.

Also, they are chasing yield.

German bond at 3% is a bargain

coolshannagh28

Geuze wrote: »

It is a bit of a mystery how a Govt with a huge debt of 200bn, and with a fiscal deficit of maybe 7bn this year, in a country with low growth and high unemployment, can borrow at 3%.

The bond markets obviously fully believe in our "recovery" story.

Also, they are chasing yield.

Our bonds are backstopped by Draghi you cant lose on them hence the low risk rates

Nino Brown

You can't look for rationality in any financial markets these days. All that printed money has to go somewhere, it doesn't have to make sense.

For example:
$19 billion for whats app, their revenue last year was $21 million
Tesla market cap is about $30 billion, they sold 21,000 cars last year. Volkswagen AG sold 9.7 million cars, their market cap is $80 billion.
Stock markets are at all time highs despite some pretty horrible fundamentals.

Ireland's bond yields are just another symptom of global debt rising from $70 trillion to $100trillion in just 6 years.

noodler

Geuze wrote: »

It is a bit of a mystery how a Govt with a huge debt of 200bn, and with a fiscal deficit of maybe 7bn this year, in a country with low growth and high unemployment, can borrow at 3%.

The bond markets obviously fully believe in our "recovery" story.

Also, they are chasing yield.

10bn exchequer deficit in 2014 - the important 'cas' figure as this is the amount that has to be borrowed.

Geuze wrote: »

Yes, that GNP growth rate is surprisingly strong.

Plus employment is growing at 3.3%

Public debt is still huge, though.

GNP growth is strong simply because MNCs sent less cash back to the States than usual because of reduced profits from the pharma cliff.

Good news in the figures was near double digit growth in Agriculture and Construction out put - the latter gorwing for the first time in years albeit from a very low base.

coolshannagh28 wrote: »

Our bonds are backstopped by Draghi you cant lose on them hence the low risk rates

Ding ding ding.

The reason why nearly all yields in the EZ are down.

Sand

omicron wrote: »

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Does anyone have any idea why bond yields are lower now when the economy is still doing relatively badly than they have ever been before? (especially with todays news of GDP falling in 2013 and the return of deflation).

I would have thought Irish debt would have been more attractive around 2005 than it is now but it seems investors are more interested in it now than they were then.

Most of the central banks in the world - especially the Fed - are printing money day and night to give to the banks. That money has to be invested somewhere, and as others have noted Draghi has taken over from the dangerously stupid Trichet. Draghi has basically thrown out the entire ECB Gospel according to St. Trichet and has said they will do whatever it takes to support the Euro, which includes backing the bonds of member-states. Whilst also refraining from threatening to suicide bomb the entire European banking system. The effect of a non-stupid central banker being behind the wheel has been impressive. Though it has meant the European government have declared victory and stopped reforms: Enda is a prime example.

Ireland would always survive the collapse of the Euro. The ECB -and their highly paid staff - would not. They seem to have realised that, finally.

You can tell is a Euro wide effect, rather than an Ireland specific issue: Rates on Greek 10 year bonds have halved in the past 12 months. Rates on Portugal 10 year bonds are down 40% over a similar time frame, etc. And Morgan Kelly noted that apparently the demand for the December bond issue came from two Irish banks, AIB and BOI, both dependant on the state. There is likely a circle of the governments guaranteeing banks, who borrow at practically 0% terms from the ECB, to buy government bonds.

One of the problems with flooding an economy with easy credit is that it leads to investment decisions entirely divorced from economic realities: like buying an acre of land in Ballygobackwards for 1 million Euro with the idea that you'll build a housing estate in the middle of nowhere with no services and no employment opportunities. We all know how that ended up.

gaius c

Geuze wrote: »

It is a bit of a mystery how a Govt with a huge debt of 200bn, and with a fiscal deficit of maybe 7bn this year, in a country with low growth and high unemployment, can borrow at 3%.

The bond markets obviously fully believe in our "recovery" story.

Also, they are chasing yield.

Who is buying?
Would they be Irish banks using 0% Draghi money to buy 3% government bonds by any chance?

Geuze

Yes, I would like to know the banks holdings on Govt bonds.

noodler

noodler wrote: »

GNP growth is strong simply because MNCs sent less cash back to the States than usual because of reduced profits from the pharma cliff.

How does that work? Surely it'll be sent to the states whatever amount is made.

noodler

Deleted User wrote: »

How does that work? Surely it'll be sent to the states whatever amount is made.

Right, so if the Pharma patent cliff has resulted in less profits being made, then there are less to send back.

AlmightyCushion

noodler wrote: »

Right, so if the Pharma patent cliff has resulted in less profits being made, then there are less to send back.

But how does that increase GNP? It will reduce the difference between GNP and GDP but I can't see how it could lead to an increase in GNP.

dissed doc

omicron wrote: »

Link



Does anyone have any idea why bond yields are lower now when the economy is still doing relatively badly than they have ever been before? (especially with todays news of GDP falling in 2013 and the return of deflation).

I would have thought Irish debt would have been more attractive around 2005 than it is now but it seems investors are more interested in it now than they were then.

What do you mean badly? The yields go up based on recommendations from risk assessors. They want a higher return, and it's guaranteed anyway through the ECB.

Low yield = sign of investors unable to leach money off an economy.

You are looking at it from the wrong perspective; i.e., presuming their perspective is your perspective.

The economy is doing fine now for regular people again, but for investors it's doing badly because they can't get more money out of it.

noodler

AlmightyCushion wrote: »

But how does that increase GNP? It will reduce the difference between GNP and GDP but I can't see how it could lead to an increase in GNP.

I am not sure I get ya?

2012 GDP is 100......net factor income is -30 so GNP is 70

2013 GDP is 99...net factor income is -20 so GNP is 79


GNP growth itself seems to come have come from construction and agriculature as both sectors recorded healthy increases in 2013 according to the QNAs.

ardmacha

AlmightyCushion wrote: »

But how does that increase GNP? It will reduce the difference between GNP and GDP but I can't see how it could lead to an increase in GNP.

This doesn't increase GNP directly, but economic activity, other than drugs, did increase last year and that increased GNP. The gap between GDP and GNP decreased because GDP was less inflated then previously.

AlmightyCushion

noodler wrote: »

I am not sure I get ya?

2012 GDP is 100......net factor income is -30 so GNP is 70

2013 GDP is 99...net factor income is -20 so GNP is 79


GNP growth itself seems to come have come from construction and agriculature as both sectors recorded healthy increases in 2013 according to the QNAs.

If pharma MNCs send most if their profits back to the US then it doesn't affect GNP whether they make a million in profit or 100 billion. So how does is the patent cliff responsible for the growth in GNP like you said earlier. If there is less profit being made then it just means less gets sent back to the parent company in the US, it doesn't mean more is spent in the local economy.

The above is a pretty simplistic example because if a company suffered a massive drop in profits they could scale back operations here which would cause a decrease in GNP and the reduction in profits could affect the tax paid by the company which one again will negatively affect GNP but neither will lead to an increase.

AlmightyCushion

ardmacha wrote: »

This doesn't increase GNP directly, but economic activity, other than drugs, did increase last year and that increased GNP. The gap between GDP and GNP decreased because GDP was less inflated then previously.

I understand that, but he said that GNP was strong because MNCs sent less money back to the states.

noodler

AlmightyCushion wrote: »

If pharma MNCs send most if their profits back to the US then it doesn't affect GNP whether they make a million in profit or 100 billion. So how does is the patent cliff responsible for the growth in GNP like you said earlier. If there is less profit being made then it just means less gets sent back to the parent company in the US, it doesn't mean more is spent in the local economy.

The above is a pretty simplistic example because if a company suffered a massive drop in profits they could scale back operations here which would cause a decrease in GNP and the reduction in profits could affect the tax paid by the company which one again will negatively affect GNP but neither will lead to an increase.

We are just getting into a mild chicken and the egg debate here but GDP is generally calculated first IIRC so we have already included any general growth in the economy in that figure.

So for the purposes of a general statement like I made, an increase in Agriculture and Construction contributed positively to GDP whilst the fall in industry output negatively impacted it.

http://www.cso.ie/en/releasesandpublications/er/na/quarterlynationalaccountsquarter42013/


GNP is essentially therefore calculated afterwards.

I am finding it difficult to verbalise what I mean exactly but I can tell you which parts of the economy grew last year based on the data, i.e. construction and agri again, but this is included in both GDP and GNP and is not specific to GNP.

Am I making any sense here? GNP calculated by backtracking from GDP. So any increase in output has already been accounted for in our broad GDP definiton.

ardmacha

I understand that, but he said that GNP was strong because MNCs sent less money back to the states.

It would be more correct to say that GNP growth was stronger than GDP growth because MNCs sent less money back to the States.

AlmightyCushion

noodler wrote: »

We are just getting into a mild chicken and the egg debate here but GDP is generally calculated first IIRC so we have already included any general growth in the economy in that figure.

So for the purposes of a general statement like I made, an increase in Agriculture and Construction contributed positively to GDP whilst the fall in industry output negatively impacted it.

http://www.cso.ie/en/releasesandpublications/er/na/quarterlynationalaccountsquarter42013/


GNP is essentially therefore calculated afterwards.

I am finding it difficult to verbalise what I mean exactly but I can tell you which parts of the economy grew last year based on the data, i.e. construction and agri again, but this is included in both GDP and GNP and is not specific to GNP.

Am I making any sense here? GNP calculated by backtracking from GDP. So any increase in output has already been accounted for in our broad GDP definiton.

In another post someone said that our GNP growth was strong and that this is a positive thing. You then said that the only reason GNP growth was strong was because of the patent cliff and MNCs sending back less money to their parent companies. It doesn't matter if it's calculated afterwards but the patent cliff can't be responsible for the GNP growth like you claim.

roro2

noodler wrote: »

I am not sure I get ya?

2012 GDP is 100......net factor income is -30 so GNP is 70

2013 GDP is 99...net factor income is -20 so GNP is 79.

This is a good example, but it doesn't seem to have solved the confusion.

In this example, GDP growth in 2013 was -1% (100 -> 99).
But GNP growth was +12.9% (70 -> 79).

In the hypothetical example, repatriated profits out of Ireland have fallen from 30 to 20 - lower drug company profits is as reasonable a guess as any for this - and this has led to high GNP growth as the reduction to GDP from net factor income as fallen by 10. What is key is not that profits have left Ireland, but that the level has fallen from 2012 to 2013 and caused an increase to GNP.

AlmightyCushion

roro2 wrote: »

This is a good example, but it doesn't seem to have solved the confusion.

In this example, GDP growth in 2013 was -1% (100 -> 99).
But GNP growth was +12.9% (70 -> 79).

In the hypothetical example, repatriated profits out of Ireland have fallen from 30 to 20 - lower drug company profits is as reasonable a guess as any for this - and this has led to high GNP growth as the reduction to GDP from net factor income as fallen by 10. What is key is not that profits have left Ireland, but that the level has fallen from 2012 to 2013 and caused an increase to GNP.

But that GNP growth wasn't as a result of the decrease in money being repatriated because that money never entered the economy. The GNP growth came from other sector of the economy.

roro2

AlmightyCushion wrote: »

But that GNP growth wasn't as a result of the decrease in money being repatriated because that money never entered the economy. The GNP growth came from other sector of the economy.

I'm not sure what you mean by it never entered the economy. Let's assume that all the NFI is from foreign drug company revenues. These arose on drugs produced in Ireland which were then exported. This production is included in GDP via the Industry sector, or in the Goods Export sector if you look at GDP from the expenditure side. The NFI is then an estimate of how much of this production is attributable to non-residents, and when this is subtracted you are left with GNP. So if NFI/drug company repatriation is much lower in a particular year, you would also expect production and exports to be lower and this already to be factored into the GDP figure, leaving aside the specifics of the patent expiry issue.

All of this highlights just one of the problems with using GNP as a measure of Ireland's economic health, and it is often put out as being superior to GDP. It's not, in my opinion. With such a large MNC presence in Ireland, and large MNCs with multiple domestic and foreign subsidiaries, GNP is very sensitive to cash flows within MNCs.

For (a simplified) example, take a MNC that is not only producing drugs in Ireland but has a complex corporate structure with Irish resident and non-resident subsidiaries. For its own reasons it lets income accrue to the Irish sub and, periodically, the Irish sub will transfer this income to another non-Irish resident sub. The decision to transfer funds will be for its own internal reasons likely to do with tax planning and company accounting periods rather than any considerations for Irish national accounts calculations. If this is a significant sum, whether the transfer happens on 31 Dec or 1 Jan will obviously have a big affect on NFI and GNP. This is one of the reasons that GNP can be very volatile from one period to the next (+5.1% in Q1 2013, -0.7% in Q2, +5.0% in Q3).

Another similar problem with GNP that is becoming more common is MNCs transferring their HQ and residency to Ireland for tax reasons. Nothing changes with the company in reality, but one day it is "foreign" and the next day it is classified as "Irish". Even this week US drug co. Horizon bought a smaller Irish co. just for "tax efficiency" reasons and will move its HQ to Dublin. American one day, Irish the next, but nothing has changed for the Irish economy.

GDP isn't perfect, but at least with GDP, you are measuring what's produced here, which is more important for things like employment, etc. But to really understand how things are, you need to look at the different components of GDP. Private Consumption is much more important for the domestic economy for example in terms of employment, tax revenue, the income multiplier, but the component is only about half the size of Exports and one euro in Private Consumption has the same GDP weight as one euro of Exports.

AlmightyCushion

If GNP increases from 100 billion in 2012 to 103 billion in 2013, how would the patent cliff and a reduction in MNCs sending less money back to the US be responsible for this?

ardmacha

roro2 wrote: »

This is a good example, but it doesn't seem to have solved the confusion.

In this example, GDP growth in 2013 was -1% (100 -> 99).
But GNP growth was +12.9% (70 -> 79).

In the hypothetical example, repatriated profits out of Ireland have fallen from 30 to 20 - lower drug company profits is as reasonable a guess as any for this - and this has led to high GNP growth as the reduction to GDP from net factor income as fallen by 10. What is key is not that profits have left Ireland, but that the level has fallen from 2012 to 2013 and caused an increase to GNP.

These examples fail to point out that if drug production falls, GDP falls. It didn't (really) so there is growth elsewhere in the economy, it is that growth that has increased GNP.

Godge

ardmacha wrote: »

These examples fail to point out that if drug production falls, GDP falls. It didn't (really) so there is growth elsewhere in the economy, it is that growth that has increased GNP.

Absolutely, that is the point I was making pages ago.

Patent cliff = revenue fall for pharmaceuticals = GDP decrease for Ireland.

That is what should have happened. What actually happened was:

Domestic economic recovery = GNP increase = GDP flat because domestic economic recovery offset by patent cliff.

noodler

Godge wrote: »

Absolutely, that is the point I was making pages ago.

Patent cliff = revenue fall for pharmaceuticals = GDP decrease for Ireland.

That is what should have happened. What actually happened was:

Domestic economic recovery = GNP increase = GDP flat because domestic economic recovery offset by patent cliff.

I think that's way too simplistic.

As a previous poster said GDP growth is important in a very tangible sense, not least because the nfi is still taxed.

What's more as the esri have pointed out, our GNP has been inflated in recent years by UK companies coming into Ireland as brass plate firms.

I have little doubt given the circa 4bn reduction in chemical/pharmacy exports that this accounts for a lot of the GDP decrease but we don't have a breakdown on what percentage of the GNP increase may have been inflated.

The GNP good, GDP bad point is massive oversimplification.

Godge

noodler wrote: »

I think that's way too simplistic.

As a previous poster said GDP growth is important in a very tangible sense, not least because the nfi is still taxed.

What's more as the esri have pointed out, our GNP has been inflated in recent years by UK companies coming into Ireland as brass plate firms.

I have little doubt given the circa 4bn reduction in chemical/pharmacy exports that this accounts for a lot of the GDP decrease but we don't have a breakdown on what percentage of the GNP increase may have been inflated.

The GNP good, GDP bad point is massive oversimplification.

You are oversimplifying what I am saying, I am not saying GNP good, GDP bad.

What I am saying is that the Irish economy is complicated by transfer pricing to an extent that it can sometimes be hard to distinguish what is happening at a macro level.

GDP is flat, we all agree. GNP is growing, we all agree.

Employment is up, tax revenue is up, consumer confidence is recovering, the patent cliff has happened, again we all agree on those.

What I am saying is that a combination of all of that information leads one to the conclusion that there is a recovery happening out there that is not being shown by the GDP figures.

noodler

Godge wrote: »

You are oversimplifying what I am saying, I am not saying GNP good, GDP bad.

What I am saying is that the Irish economy is complicated by transfer pricing to an extent that it can sometimes be hard to distinguish what is happening at a macro level.

GDP is flat, we all agree. GNP is growing, we all agree.

Employment is up, tax revenue is up, consumer confidence is recovering, the patent cliff has happened, again we all agree on those.

What I am saying is that a combination of all of that information leads one to the conclusion that there is a recovery happening out there that is not being shown by the GDP figures.

I'm sorry Godge, I didn't mean to address my whole post to your quote.

roro2

Godge wrote: »

You are oversimplifying what I am saying, I am not saying GNP good, GDP bad.

What I am saying is that the Irish economy is complicated by transfer pricing to an extent that it can sometimes be hard to distinguish what is happening at a macro level.

GDP is flat, we all agree. GNP is growing, we all agree.

Employment is up, tax revenue is up, consumer confidence is recovering, the patent cliff has happened, again we all agree on those.

What I am saying is that a combination of all of that information leads one to the conclusion that there is a recovery happening out there that is not being shown by the GDP figures.

There is a recovery, but it is limited, and the GDP figures are an important part of the picture. But you have to look at the different components of GDP rather than just the headline total GDP.

In terms of the domestic economy:

• Yes, employment is up, and significantly so. But average weekly earnings are falling and disposable income is falling at an even greater pace. So info from the labour market is not all positive.
• Tax revenue has been increasing for the past number of years but this is inevitable with budgetary measures. Taking just the first two months of the year, tax revenues were flat on last year. In 2013, tax revenues were higher than the previous year but were a little behind government forecasts and VAT receipts were the biggest underperformer versus forecasts in 2013. So the best thing about tax revenues at the moment is that they have not been far behind target, but a 6% increase is needed this year just to meet the 2014 budget target.
• Consumer confidence has been increasing consistently for over a year. But it doesn't mean a lot if it doesn't translate into real improvements. Personal Consumption (from the GDP data) fell again in 2013, by 1.1%, despite expectations that it would increase. The fall in 2012 was lower at 0.3%. Retail sales have improved in early 2014 so the hope is that that will continue and this will help personal consumption this year.

Of course you are entitled to conclude that there is a broad-based recovery that is being missed by the GDP and other data, but my opinion is that it is limited. I think there will be improvements in some categories but a big factor is the high levels of household debt, high levels of deleveraging and high levels of arrears that will take a long time to unwind and will constrain the improvements elsewhere in the economy.

Godge

roro2 wrote: »

There is a recovery, but it is limited, and the GDP figures are an important part of the picture. But you have to look at the different components of GDP rather than just the headline total GDP.

In terms of the domestic economy:

• Yes, employment is up, and significantly so. But average weekly earnings are falling and disposable income is falling at an even greater pace. So info from the labour market is not all positive.
• Tax revenue has been increasing for the past number of years but this is inevitable with budgetary measures. Taking just the first two months of the year, tax revenues were flat on last year. In 2013, tax revenues were higher than the previous year but were a little behind government forecasts and VAT receipts were the biggest underperformer versus forecasts in 2013. So the best thing about tax revenues at the moment is that they have not been far behind target, but a 6% increase is needed this year just to meet the 2014 budget target.
• Consumer confidence has been increasing consistently for over a year. But it doesn't mean a lot if it doesn't translate into real improvements. Personal Consumption (from the GDP data) fell again in 2013, by 1.1%, despite expectations that it would increase. The fall in 2012 was lower at 0.3%. Retail sales have improved in early 2014 so the hope is that that will continue and this will help personal consumption this year.

Of course you are entitled to conclude that there is a broad-based recovery that is being missed by the GDP and other data, but my opinion is that it is limited. I think there will be improvements in some categories but a big factor is the high levels of household debt, high levels of deleveraging and high levels of arrears that will take a long time to unwind and will constrain the improvements elsewhere in the economy.

I never said the recovery was extensive, just saying that the fall in GDP did not reflect the beginnings of the recovery that is happening because the patent cliff issue distorted the overall picture.

How much of a recovery is happening is much harder to figure out and you have pointed out some of the limitations and some of the questions. Whether the recovery can be sustained is also questionable for all of the reasons you list but there are green shoots.

realitykeeper

omicron wrote: »

Link
Does anyone have any idea why bond yields are lower now when the economy is still doing relatively badly than they have ever been before? (especially with todays news of GDP falling in 2013 and the return of deflation).

I would have thought Irish debt would have been more attractive around 2005 than it is now but it seems investors are more interested in it now than they were then.

One possible explanation is that investors still believe the rating agencies. For example, Fitch`s are rating the US bonds as AAA, whereas I suspect they would be closer to junk where it not for political influence.

The powers that be want investors to think the recovery is real and sustainable when in truth it is neither. Borrowing billions will of course inflate an economy like ours (which is what happened) but that growth is inherently unsustainable. In fact the growth in the Irish economy could be compared with a cancerous growth because it is spurned by borrowed stimulus money which only matters in the internal Irish economy and not by competitiveness which is all important in trade balances with the rest of the world.