July 20, 2018 - Latest: What has happened to markets this year? by Darius McDermott
3rd January 2012
very intersting as always. I am going to show my ignorance here, but have a question or two:
1. Are not yields in the UK artificially low because the government changed the rules on pension funds to make them buy more gilts?
2. Is n’t the same effect created by the way that bank capital ratios are calculated?
3. Isn’t the same created by QE?I f the answer to all three is yes, then the whole thing is a totallly rigged marketplace, not based on your rational list (which would have UK yields much higher)
I think that 1 was a while back but the other two are more recent. Actually we are probably coming to the end of the gilt buying by UK banks as I remember looking at it before and as ever time passes leading to an element of “times up” by now. Point three is ongoing and we saw £1 billion of QE this afternoon in the 2015-19 maturity range.
So yes there is a strong element of rigging the game here. Perhaps the fact that they like to rig games themselves meant that our authorities were ill-equipped to deal with Liebor and its problems…
On reflection maybe the fact that none of the users of QE have negative interest rates is revealing of a proper market trying to break out. It is certainly not something that you would get the Bank of England publicising!
Bulgaria recently issued some 5 year Eurobonds at 4.5% – refinancing some issued 10 years ago at 7.5%. It’s not negative interest rates but the politicians are proclaiming the lowered yields as a success.
It looks like a good bet for the investors – much higher yield and much lower levels of debt than France or England.
The chase for yield is certainly on mostly because these days there is so little of it to go around. Ireland is an example of where (public) debt levels can be misleading and then blow out, but in these times to get 4.5% for five years denominated in Euros well thats the same as increasingly troubled Spain.
I have taken a look at the longer-term yield pattern for Bugaria and ten years ago looks something of a peak but interestingly they havent fallen much over the past 12 months. The ECB calculates monthly averages and if we stay with June and go back in time we see for the ten-year bond yield goes 6.05% (2010), 5.39% (2011) and 5.07% (2012).
On that basis Bulgarian bonds have underperformed many others was that point made to the politicians? A chance for profit or is there a reason behind that do you think?
Oh and the winner looks to have been Latvian bonds where the ten year yield has plummeted from over 13% in early 2010 to the same as Bulgaria now. So it would have been a nice spread trade and any fund manager who managed it deserves his perfromance fee!
The currency board discipline with basically balanced budgets is taken as an article of faith – voters remember the pain of currency crisis so profligacy might be electoral suicide. 3% adds up to nearly 30M euro saving – that’s not a trivial amount here.
Bulgaria had an IMF rescue 15 years ago. Generally the Bulgarian
politicians are similar to Greek politicians – hence the markets have
good reason for a risk premium. If British politicians had equal fiscal discipline then the UK would be rich.
I’m a little bit confused about those negative interest rates. Isn’t it better to keep the cash instead of placing it into some negative yield papers?
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