Bond Market Watch

gerhard dengler

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Bonds are IOU's issued by sovereign nations, municpals and companies, to investors in order to raise capital.

A nation/municipal/company, issues a bond and an investor purchases the bond and each bond issued carries an interest charge (called yield).
There is a correlation between bond yield and bond price : when the bond price drops, yields rate increase and vice versa.

Sovereign bonds are deemed to be probably the most secure form of investment because these bonds are backed, or underwritten, by the country issuing the bond. Also bonds provide a guaranteed rate of return and are therefore deemed to be "super secure".

Every other investment type value (stocks/shares/derivatives) is predicated on the fortunes of how the bond market is performing.


In the last few years the volume of bonds issued in the market has rocketed. Why? One reason is that because the banking system has collapsed it became more difficult to raise finance/capital so the number of bonds issued has increased.

Also many countries instead of paying off legacy debt, have instead issued new debt (bonds) to repay legacy debt (bonds). And because countries have been victims of the financial crash they are required to issue more bonds to generate additional capital to keep their countries going.

So the volume of bonds issuance in the last 35-40 years has exploded relative to what it had been, and relative to other debt markets (such as bank credit, or the stock market).

In recent years, bond yields have been extremely low meaning for issued bonds. Some countries like Germany their 10 year bond had generated a negative yield (meaning that instead of Germany paying yield - interest - on it's debt to an investor, an investor in German bond pays interest to Germany for buying a 10 yr bond).

However since summer 2016, it is noticeable that yields for sovereign debt have begun to rise.
American 10 year bond has risen sharply
United States Government Bond 10Y | 1912-2016 | Data | Chart | Calendar

The UK 10 year bond too has started to rise sharply
United Kingdom Government Bond 10Y | 1980-2016 | Data | Chart | Calendar

Even Germany's 10 yr bond yield has started to rise above the rate it was earlier this year
Germany Government Bond 10Y | 1980-2016 | Data | Chart | Calendar
(and remember all other sovereign bond yields are benchmarked against German yields).

Yields tend to start rising when

(1) there is sentiment where those who have bought bonds looks to sell (and thus create an over supply of sellers in the market), or
(2) there is a loss of confidence in the ability of the borrower to repay the bond (Greece for example).

If higher bond yields are an accurate indicator that the bond market is starting to crack, it follows that higher yields will only add to the overall levels of indebtedness
Also if the bond market is cracking, it means that the equity (stocks/shares/futures/options) will start to crack too.

Interesting times.
 


gerhard dengler

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Good spot. I see that the Irish 10Y is at its highest levels since late June. It's only picked up in the last couple of days.

Ireland 10-Year Bond Yield - Investing.com

If sovereign bond yields start soaring, it will truly be the perfect storm.
Thanks.

My real concern is if rising yields are an accurate indicator that the bond market is beginning to crack, then there will be more trouble ahead. Even an upward movement in a few basis points is going to add significantly to cost of interest (yield) on outstanding debts.

The volume of bonds in the market spells trouble where yields are rising.
The value of bonds in the market spells trouble where yields are rising.

If the bond market is cracking, it will bring down equity markets too.

Rising yields makes an already fragile international economic situation, worse.
 

Clanrickard

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Apr 25, 2008
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33,236
Bonds are IOU's issued by sovereign nations, municpals and companies, to investors in order to raise capital.

A nation/municipal/company, issues a bond and an investor purchases the bond and each bond issued carries an interest charge (called yield).
There is a correlation between bond yield and bond price : when the bond price drops, yields rate increase and vice versa.

Sovereign bonds are deemed to be probably the most secure form of investment because these bonds are backed, or underwritten, by the country issuing the bond. Also bonds provide a guaranteed rate of return and are therefore deemed to be "super secure".

Every other investment type value (stocks/shares/derivatives) is predicated on the fortunes of how the bond market is performing.


In the last few years the volume of bonds issued in the market has rocketed. Why? One reason is that because the banking system has collapsed it became more difficult to raise finance/capital so the number of bonds issued has increased.

Also many countries instead of paying off legacy debt, have instead issued new debt (bonds) to repay legacy debt (bonds). And because countries have been victims of the financial crash they are required to issue more bonds to generate additional capital to keep their countries going.

So the volume of bonds issuance in the last 35-40 years has exploded relative to what it had been, and relative to other debt markets (such as bank credit, or the stock market).

In recent years, bond yields have been extremely low meaning for issued bonds. Some countries like Germany their 10 year bond had generated a negative yield (meaning that instead of Germany paying yield - interest - on it's debt to an investor, an investor in German bond pays interest to Germany for buying a 10 yr bond).

However since summer 2016, it is noticeable that yields for sovereign debt have begun to rise.
American 10 year bond has risen sharply
United States Government Bond 10Y | 1912-2016 | Data | Chart | Calendar

The UK 10 year bond too has started to rise sharply
United Kingdom Government Bond 10Y | 1980-2016 | Data | Chart | Calendar

Even Germany's 10 yr bond yield has started to rise above the rate it was earlier this year
Germany Government Bond 10Y | 1980-2016 | Data | Chart | Calendar
(and remember all other sovereign bond yields are benchmarked against German yields).

Yields tend to start rising when

(1) there is sentiment where those who have bought bonds looks to sell (and thus create an over supply of sellers in the market), or
(2) there is a loss of confidence in the ability of the borrower to repay the bond (Greece for example).

If higher bond yields are an accurate indicator that the bond market is starting to crack, it follows that higher yields will only add to the overall levels of indebtedness
Also if the bond market is cracking, it means that the equity (stocks/shares/futures/options) will start to crack too.

Interesting times.
A lot also to do with ultra cheap interest rates. Will CBs continue quantitative easing?
 

Mad as Fish

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Dec 6, 2012
Messages
24,185
Thanks.

My real concern is if rising yields are an accurate indicator that the bond market is beginning to crack, then there will be more trouble ahead. Even an upward movement in a few basis points is going to add significantly to cost of interest (yield) on outstanding debts.

The volume of bonds in the market spells trouble where yields are rising.
The value of bonds in the market spells trouble where yields are rising.

If the bond market is cracking, it will bring down equity markets too.

Rising yields makes an already fragile international economic situation, worse.
Will this mean that DB will be still deeper in the doo doo's?
 
O

Oscurito

Thanks.

My real concern is if rising yields are an accurate indicator that the bond market is beginning to crack, then there will be more trouble ahead. Even an upward movement in a few basis points is going to add significantly to cost of interest (yield) on outstanding debts.

The volume of bonds in the market spells trouble where yields are rising.
The value of bonds in the market spells trouble where yields are rising.

If the bond market is cracking, it will bring down equity markets too.

Rising yields makes an already fragile international economic situation, worse.
A lot of governments have eased up on their budget balancing (aka "austerity") plans on the back of exceptionally low borrowing rates. Our own shower could be a lot more proactive in balancing the books.

In the UK, the new Chancellor is a lot less ambitious on hitting the zero deficit than Osbourne was. Higher borrowing rates will make that more problematic.
 

hammer

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.632% for The Republic.

Jaysus only a few years ago we could barely borrow 15%+ and were fully funded until next Sunday.
 

gerhard dengler

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A lot also to do with ultra cheap interest rates. Will CBs continue quantitative easing?
Yield is said to be an indicator of demand for a bond.
Conventional wisdom is - the higher the demand for a bond, the lower the yield for that bond.

Central banks buying sovereign bonds, municipal bonds and corporate bonds probably means that demand was/is artificially higher for bonds, meaning that yield was/is artificially low for bonds.

Central banks maintain that they want to see inflation rates (annual increase in costs in the economy) of 2%.
Central banks assumed that QE would have re-inflated economies which would lead to inflation. QE has failed in that regard.

It might be that central banks will get the inflation rate that they seek, but do so through the bond markets cracking and not through QE.
 

gerhard dengler

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.632% for The Republic.

Jaysus only a few years ago we could barely borrow 15%+ and were fully funded until next Sunday.
15% on €64 billion sovereign debt at the time.

Yield rates won't have to rise too much to light the fuse under €200 billion sovereign debt.
 

hammer

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Dont stress too much about the €200 billion.

Eventually SF IRA will be the largest party in Government and they will cancel it.

Unfortunately I wont be around in 3016.
 

gerhard dengler

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Austria is issuing a 70 year bond.

https://www.rte.ie/news/business/2016/1025/826716-austria-bond-auction/

We did a 100 year one a while back. In your face, Vienna! :cool:

And Greece is about as likely to be able to borrow on its own in the next 10 years as I am to own an island in the Aegean Sea. *sigh*

Greece Government Bonds - Investing.com
This is investors chasing yield.

Short term sovereign debt (1 yr, 2yr) is still at negative yields for investors. Investors cannot earn any returns for bonds in the short term.
Longer debt (30 yrs, 50 yrs, 100 yrs) is yielding better returns for investors.

If the bond market is starting to crack, yields across all terms of bond debt will start to increase.
 

Mad as Fish

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24,185
Dont stress too much about the €200 billion.

Eventually SF IRA will be the largest party in Government and they will cancel it.

Unfortunately I wont be around in 3016.

But I'm sure your spirit will live on. (heads for the drinks cabinet)
 

okibb

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rising bond yields could also mean falling confidence.

Don't worry, the CB's helicopter money will be replaced by IMF SDR's - the only downside would be a severe constriction on cash and withdrawals and a few bail-ins here and there.
 

SamsonS

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This is investors chasing yield.

Short term sovereign debt (1 yr, 2yr) is still at negative yields for investors. Investors cannot earn any returns for bonds in the short term.
Longer debt (30 yrs, 50 yrs, 100 yrs) is yielding better returns for investors.

If the bond market is starting to crack, yields across all terms of bond debt will start to increase.
Obviously at the 64b we weren't paying 15%.

As it stands we are paying a weighted average of around 3.1%, as a lot of our older debt, from 08/09/10 was borrowed at between 4.4-6%.

From my read of it, once we can refinance at less than the 3.1%, then new debt will be cheaper to finance than the debt it is replacing.

The NTMA have a good chart on this going back 20 years, makes interesting reading.
Historical Debt Interest | National Treasury Management Agency (NTMA)

In 1996 17.7% of tax revenue was needed to service the national debt, and it was falling, falling to just 3.4% in 2007. It rose from there, peaking in 2013, at 19.4% of tax revenue, before falling back to 15.3% in 2015, and a bit below that again in 2016.

In money terms, from 2008 to 2015 we have spent 45b on interest on the General Gov Gross Debt.

Just to give it some context, if debt was a government dept, it would be the fourth biggest, after DSP, Health and Edu!
 
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Governments have tinkered with bonds since 2008 with QE.

Debt has to be repaid sometime and nobody has any idea when or how/
 

off with their heads

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Dont stress too much about the €200 billion.

Eventually SF IRA will be the largest party in Government and they will cancel it.

Unfortunately I wont be around in 3016.
I suppose Kenny will be leading fine gael into GE 3016 :)
 


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