Thursday, March 26, 2009
UK's Story (March 25th 2009):
In a reminder of how bad things are across the globe, the U.K. failed to find enough buyers for $2.55 billion (1.75 billion pounds) in gilt-edge bonds, Bloomberg is reporting. This is debt that the U.K. is attempting to sell to raise money to help the country out of its recession. The snub marks the third time in the past 10 years Britain has been unable to complete a debt auction. This is bad news on its face, but it could be worse news going forward: Prime Minister Gordon Brown hopes to sell $214 billion worth of debt this year and an additional $215 billion next year. The Treasury was able to sell $2.4 billion worth of the 40-year securities, leaving some $100 million worth of debt unsold. The failed auction could be a bad sign for a number of nations that hope to sell debt to raise money to dig out of the recession. The United States plans to triple its debt sales this year to a record $2.5 trillion. Germany, by comparison, plans a far more modest $470 billion debt offering this year.
Ireland's Story (March 25th 2009):
Ireland's successful sale of €1bn in bonds, in its first auction since 2005, showed investor concern about the risk of default is overblown and the securities offer value, investment bank ING said yesterday. The National Treasury Management Agency (NTMA) sold the bonds to raise cash as the economic slump hoovers up tax revenue. Irish 10-year bonds rose after the auction, reducing the spread between the securities and German benchmark notes to the narrowest in three weeks. The cost of insuring against a government default also declined, credit-default swap prices showed. "This is an opportunity to buy," said Padhraic Garvey, head of investment-grade bond strategy at ING in Amsterdam. "Ireland's bond spread overshot and talk about the country potentially defaulting on its debt was just ridiculous and far-fetched." The three-year €300m bond was 3.8 times oversubscribed while the 10-year €700m was 2.7 times over, the NTMA said. "The healthy demand is really good news," said Rossa White, chief economist at Davy Stockbrokers. Moreover, spreads on the 2020 note have tightened by 30 basis points in the secondary market already, he added. Analysts added that the CDS went too far in February when worries about Ireland were at their highest, and it has now converged with the cash market. The spread between Irish and German 10-year debt narrowed 24 basis points yesterday to 249. The average spread during the past 10 years between Irish and German 10-year debt was 18 basis points, according to Bloomberg analysis. However, market watchers added that the key event in the Irish economic calender is the April 7 Budget. "If hard decisions are made on current Government spending, we could see a significant further tightening of Irish spreads vis-a-vis Germany," Mr White said. Although this was the first auction in some time, Ireland has already had several fund raisings via syndication whereby governments use banks to find buyers for the securities rather than offer the debt through auction. In January and February the NTMA raised €10bn in two bond sales via syndication. Other commentators were also cheered by the latest news. "Ireland chose a fantastic time to put their toes back in the water," said Peter Chatwell, a fixed-income strategist in London at Calyon, the investment-banking unit of Credit Agricole SA. "Risk appetite has improved and the spread is pulling in, suggesting the auction inspired a lot of confidence."
Analysis:
Clearly amidst the doom and gloom this is excellent news, without wanting to understate the serious challenges that lie ahead - they obviously see something we don't! But the markets seem to be suggesting that either Brown is complete nuts if the UK cannot raise 1.75bn at a gilt auction and he is hoping for 150bn of borrowing or Ireland is taking the pain quick and fast for their liking. Me thinks the latter is of utmost importance. Ireland is x4 over subscribed on it's debt raising! This is extremely good news. The markets are willing to lend to trusty Ireland in vast amounts. The borrowing plans of the UK look shaky and ridiculous now and the risk of default has suddenly shifted from Ireland onto UK. Mervin King, the head of the Bank of England, before this auction warned that not only where the public finances out of control but that a second stimulus plan was unaffordable. This means the UK, having failed to raise debt, is having to print that money right now...that means inflation is becoming a risk in a declining economy which in turn raises the horrid specter of hyper inflation should the BOE go too far. It is all a big game of chess. The UK has to take action should a second gilt raising exercise fail and dramatically cut down on spending like Ireland has done. Brown won't be able to keep his stimulus in full after this fiasco. Unlike Ireland which has received a huge boost - this was a pretty big warning shot for the UK. "Don't take the markets for granted".
In a reminder of how bad things are across the globe, the U.K. failed to find enough buyers for $2.55 billion (1.75 billion pounds) in gilt-edge bonds, Bloomberg is reporting. This is debt that the U.K. is attempting to sell to raise money to help the country out of its recession. The snub marks the third time in the past 10 years Britain has been unable to complete a debt auction. This is bad news on its face, but it could be worse news going forward: Prime Minister Gordon Brown hopes to sell $214 billion worth of debt this year and an additional $215 billion next year. The Treasury was able to sell $2.4 billion worth of the 40-year securities, leaving some $100 million worth of debt unsold. The failed auction could be a bad sign for a number of nations that hope to sell debt to raise money to dig out of the recession. The United States plans to triple its debt sales this year to a record $2.5 trillion. Germany, by comparison, plans a far more modest $470 billion debt offering this year.
Ireland's Story (March 25th 2009):
Ireland's successful sale of €1bn in bonds, in its first auction since 2005, showed investor concern about the risk of default is overblown and the securities offer value, investment bank ING said yesterday. The National Treasury Management Agency (NTMA) sold the bonds to raise cash as the economic slump hoovers up tax revenue. Irish 10-year bonds rose after the auction, reducing the spread between the securities and German benchmark notes to the narrowest in three weeks. The cost of insuring against a government default also declined, credit-default swap prices showed. "This is an opportunity to buy," said Padhraic Garvey, head of investment-grade bond strategy at ING in Amsterdam. "Ireland's bond spread overshot and talk about the country potentially defaulting on its debt was just ridiculous and far-fetched." The three-year €300m bond was 3.8 times oversubscribed while the 10-year €700m was 2.7 times over, the NTMA said. "The healthy demand is really good news," said Rossa White, chief economist at Davy Stockbrokers. Moreover, spreads on the 2020 note have tightened by 30 basis points in the secondary market already, he added. Analysts added that the CDS went too far in February when worries about Ireland were at their highest, and it has now converged with the cash market. The spread between Irish and German 10-year debt narrowed 24 basis points yesterday to 249. The average spread during the past 10 years between Irish and German 10-year debt was 18 basis points, according to Bloomberg analysis. However, market watchers added that the key event in the Irish economic calender is the April 7 Budget. "If hard decisions are made on current Government spending, we could see a significant further tightening of Irish spreads vis-a-vis Germany," Mr White said. Although this was the first auction in some time, Ireland has already had several fund raisings via syndication whereby governments use banks to find buyers for the securities rather than offer the debt through auction. In January and February the NTMA raised €10bn in two bond sales via syndication. Other commentators were also cheered by the latest news. "Ireland chose a fantastic time to put their toes back in the water," said Peter Chatwell, a fixed-income strategist in London at Calyon, the investment-banking unit of Credit Agricole SA. "Risk appetite has improved and the spread is pulling in, suggesting the auction inspired a lot of confidence."
Analysis:
Clearly amidst the doom and gloom this is excellent news, without wanting to understate the serious challenges that lie ahead - they obviously see something we don't! But the markets seem to be suggesting that either Brown is complete nuts if the UK cannot raise 1.75bn at a gilt auction and he is hoping for 150bn of borrowing or Ireland is taking the pain quick and fast for their liking. Me thinks the latter is of utmost importance. Ireland is x4 over subscribed on it's debt raising! This is extremely good news. The markets are willing to lend to trusty Ireland in vast amounts. The borrowing plans of the UK look shaky and ridiculous now and the risk of default has suddenly shifted from Ireland onto UK. Mervin King, the head of the Bank of England, before this auction warned that not only where the public finances out of control but that a second stimulus plan was unaffordable. This means the UK, having failed to raise debt, is having to print that money right now...that means inflation is becoming a risk in a declining economy which in turn raises the horrid specter of hyper inflation should the BOE go too far. It is all a big game of chess. The UK has to take action should a second gilt raising exercise fail and dramatically cut down on spending like Ireland has done. Brown won't be able to keep his stimulus in full after this fiasco. Unlike Ireland which has received a huge boost - this was a pretty big warning shot for the UK. "Don't take the markets for granted".
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