NTMA bond issue

The Central Bank
1

I’ve picked up on a comment from a previous thread that stated that the NTMA are going to do a bond issue over the next few days.

To me, this seems like a big deal as it will provide an important indicator over how the bond market smell Ireland in terms of credit risk, and what we as a nation will pay for that risk in the form of higher interest rates.

However, I’m not a financial genius, and I can safely say that I could have been blissfully ignorant of CDS spreads, bond markets, subordined debt and various other financial market terminology and tools were it not for the situation in which we currently find ourselves.

So I’d like to present my own simplified take on the situation, and see if my analysis stands up or whether I’m missing or misunderstanding something important. Hopefully a more financially literate pinster can inform me.

I know that Irelands CDS rating has reached almost 400bps, meaning that it costs €400,000 to insure €10m of Irish soverign debt. While we still have a triple A liquidity rating from the likes of S&P, this to me seems ludicrous in the face of such figures. From the calculations I have seen, and forgive me if I’m wrong, 400bps implies an almost 1 in 3 chance of default as a compounded probability over 5 years. So I think the market will treat this AAA rating with derision at best.

Now, if a bond issue does take place, how exactly does this factor into the bond? Does it increase the interest rate payable by such a bond, if the markets feel that the investment is riskier? It would seem to me that this would inevitably be the case. If so, what would the likely increase be? Would there be a risk that the markets not accept the bond offering at any interest rate, or at usurious interest rates? What could this do to our CDS spreads?

I’m asking this because I have a rather sinking fear that if this bond issue is unsuccessful, it could precipitate a snowball effect whereby the Irish state could be much more likely to default. Is this concern founded?

Sorry for all the questions, but I’m trying to wrap my head around this and figure out what connects the dots.

2

I have to say that is a really good summary of how I also understand the situation. You should consider banking as a career. They will have to pay a huge interest rate to get the bond away. If they dont and it fails the s**t will hit the fan and there is risk that the PIGS and Eastern Europe will go down with us. Beggs stike on 30th of March will be irrevlavent.

3

Jaysus! That’s a bit harsh!

https://idp05.files.wordpress.com/2008/03/banker-cat.jpg

4

I don’t know what the term is, if it is 5 years or fewer, I would be amazed if it didn’t get away. As I’ve said before, I think the problem will come with 10 year issues and with commercial paper roll-over. For the moment Ireland is still AAA and there is appetite from pension funds and the like (never mind the banks).

5

back in october/november there was a poll on the pin predicting when the Government would run out of cash, i believe March topped the poll. if it fails on Friday (i think it’s Friday), it will snowball and it will put the Government under instruction from whoever bails us out.

oddly it will be a harsh liberation from the cronies but it will still remain to the irish electorate if anyone in government is to be charged for using their office for personal enrichment at the expense of the state.

the harsher the bail-out terms, the more likely that criminal charges will follow,but will the electorate see through the scape goats?

will Bertie still be a saint? in-fact-a!

6

A few more questions from someone trying to get their head around it all. If bonds are issued can anyone anywhere in the world buy them? Is there a limit? Is there a danger in a large amount being bought by an individual/group of individuals? I keep thinking about Russian oligarchs and Saudi rich boys buying football teams just for fun.

7

Only in Honduras …

latribuna.hn/news/50/ARTICLE/57027/2009-02-21.html

8

Rough translation - In a three day visit, the distinguished Irish visitor arrived in the country on 18th Feb to give a talk titled “The Celtic Tiger : The Irish Model of Development”, to members of the Honduran Chamber of Commerce.

9

Swiss - a good post. The CDS issue is a bit of a red oily fish. They matter in so far as they are related to the bond spread. That is the current yield (what you get now if you biy the bond on the open market from those russian oligarchs) on our bonds versus the benchmark (in the Euro zone thats the germans). In most cases one has to price the bond on the assumption that people will want to get the same return (yield) on the new bond as they can on the old one assuming similar timeframe etc.
So, at present Germany would pay c2.2% for 5 year and c3% for 10 year money, if they were to issue and the markets required the current yield. We on the other hand have yields of 4.7% and 5.6% for 5 and ten year money. The spread over benchmark then is 250 basis points (bp) or 2.5% for 5 year and 260 bp for ten year. CDS spreads are higher than that as the market is thinner, tthere is more speculation etc. But there is a 90% correlation between teh two spreads.
Help?

10

It doesn’t really matter, as they give you their money! In fact, the NTMA don’t sell them directly to the punter, they sell them to a range of banks who sell them on. List of primary dealers here:
ntma.ie/GovernmentBonds/primaryDealers.php
The primary dealers are selling them on at the same time as they are bidding on them. They get to keep a small amount of the bid, I believe.

There are also secondary bond dealers who trade in Irish bonds on the ISEQ, the action of which provides up to date pricing information so the NTMA know what price to pitch their new issues at.

More information here:
ntma.ie/GovernmentBonds/govtBondsIntro.php

You can see just how wildly out the NTMA were in their projections for the Irish economy in October 2007 here:
ntma.ie/Publications/2007/investor_oct07.pdf

11

Sweet jesus that is so wildly off mark…one assumes that they were on angel dust?

12

While we’re on the subject, I have a question!

Just looking at the daily bond report on the NTMA website and it contains this table:
ntma.ie/GovernmentBonds/ISE_ … -02-24.pdf

IE0032584868 3258486 3.25 Treasury Bond 2009 18-Apr-09 3.25% Annual 100.24 IE0006857423 685742 4.0 Treasury Bond 2010 18-Apr-10 4.00% Annual 102.03 IE0004612218 461221 8.5 Cap Stock 2010 1-Oct-10 8.50% Semi-Annual 112.45 IE00B3FCJN73 B3FCJN7 4.0 Treas Bnd 2011 11-Nov-11 4.00% Annual 102.54 IE0004617266 461726 8.75 Cap Stock 2012 30-Sep-12 8.75% Semi-Annual 116.39 IE0031256328 3125632 5.0 Treasury Bond 2013 18-Apr-13 5.00% Annual 102.25 IE00B3KWYS29 B3KWYS2 4.0 Treas Bnd 2014 15-Jan-14 4.00% Annual 97.58 IE0004680173 468017 8.25 Treas Bond 2015 18-Aug-15 8.25% Annual 119.01 IE0006857530 685753 4.6 Treas Bond 2016 18-Apr-16 4.60% Annual 97.47 IE00B28HXX02 B28HXX0 4.5 Treas Bnd 2018 18-Oct-18 4.50% Annual 93.93 IE00B2QTFG59 B2QTFG5 4.4 Treas Bnd 2019 18-Jun-19 4.40% Annual 91.50 IE0034074488 3407448 4.5 Treas Bnd 2020 18-Apr-20 4.50% Annual 90.95

The last column is the ‘clean price’ - is this the price the bond is trading at? Look at the price on the 2020! That’s a yield of 15.5% Or am I looking at it totally wrong?

IE00B3KWYS29 - is the issue from last month…

13

Would have thought yield is 4/97.58= 4.099%

14

:blush:

So coupon / price = yield?

4.5/90.95 = 5%

Ah that makes a lot more sense. Thanks.

15

It was issued in 2004 at a discount - 97. its yield according to Reuters is 5.6%

16

:confused:

shrugs

Glad I only program stuff.

This one is the one I’m interested in. It’s the longest dated one extant, so I want to see what the market expects the yield to be on the next issue 10 yr issue.

IE0034074488 3407448 4.5  Treas Bnd 2020     18-Apr-20 4.50% Annual       90.95
17

I did find this rather alarming chart of its price:
boerse-go.de/profil/proficha … tId/257779

18

Am I right in saying 4.95% yield?

Anyone thinking that’s an okay price to lock away some cash for ten years or so?

19

The yield is a combination of the price, coupon and time to maturity. A very crude calculation on the 2020 bond would give a yield of 5.85%. You pay 90.95 and will receive 100 on maturity, a gain of 9.05. Over 11 years this gives you 0.82 a year (9.05 / 11). Add the coupon of 4.5 to this and you get 5.32 a year.

5.32 / 90.05 gives a yield of 5.85%. There are much more accruate ways of doing it by discounting the cashflows to maturity, but that should give an idea on how its arrived at.

20

Super, thank you Aaron1.

So a new issue of a ten year bond would expect to pay at least that amount in coupon?