Let’s have some fun…. Bond Style

We have been shaken, and the markets are stirred. Why not have fun in our final days? When asked what I’d do if I was on a plane that was going to crash, my simple answer is ask somebody for a shag and drink champagne until it all goes bang, what a pity that during the bond market equivalent of this all we can do is shake in our boots, I say crack open the bubbly.

O.k. So we can’t afford to drink champagne, and with any flight/sex innuendo I’ll become the blog version of Prenderville so we’ll leave that alone too.

What could we do with our bond market to sort out this mess? The issue we currently have is that there is capital depreciation on our bonds leading to higher yields, when you hear that our yields hit 8% it doesn’t mean that we are paying more, it means people are selling at a loss and new buyers get a higher yield on the indexed mix of bonds (Read More

Recent Irish bond yields explained in plain English.

We are not issuing bonds, so the cost of servicing our debt has not magically risen to ‘7%’ because we are not borrowing at that rate, what is happening is all in the secondary market.

What that means: The primary market is when the bond is first issued at par (100) and with a coupon (for instance 3%). When a bond is issued the main concern of a bond buyer is getting your capital back (that par value of 100) and it trumps the yield in terms of importance, so you regularly see people buy debt at very low rates from those most likely to pay it back, Microsoft recently issued a bond at 0.8%!

That is where the Ireland story gets interesting, our bond yield is not 7% because we issued it at that yield or interest rate, it is 7% because people are sacrificing their capital to get out of the trade. That means they don’t believe they will get their money back at the end and …

Read More