Contagion

When you squeeze a balloon it just bulges out at a different place, that seems to be happening to the PIIGS (although now it is just PIS because I & G have been ‘sorted out’). Look at the prices on Irish banks coming down in some cases by an impressive near 1%, that’s a giant step for a single day. All of our major institutions are dropping – and that means the fear of something happening to our banks is subsiding from the perspective of those holding bond risk. Which makes Dolmens ‘sell all’ call on AIB LT2’s a little odd.

Then look at sovereigns

And you see that our problem has now become a Portuguese problem, the bond market will start to lean on them next. I have said for some time that we will watch the domino effect until at some point we get to Spain and at that point it isn’t a game any more.

Many thanks to CMA for the charts

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Irish debt, third most likely to default in the world?

Credit Default Swaps hit a record high yesterday for Irish Sovereign Debt. CNBC spoke to Brian Cowen on this topic yesterday, our Student Protests got a mention at the very start, Mr. Cowen believes this is short term sentiment, and while you can use a cyclical argument against Ireland, there is a secular argument about our debt: that it will be more expensive in the future (forever).

Using credit default swaps we are placing ahead (as in more risky) than Pakistan, Argentina and Iraq! Behind only Venezuela and Greece, interesting times….

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What is happening with Irish Bonds?

With our bonds auctions making news (in the past bond auctions were dreadfully boring affairs) and the recent S&P downgrade on the nation I thought it might be useful to take a look at some charts. What I believe is happening is that nobody truly believes we will default, Greece wasn’t allowed to do it, the ECB is backing auctions where necessary and yield hunters are happy to lend at an appropriate price (thus the over subscription of the issuance).

This is a chart of Credit Default Swap prices, the purple line is Ireland, Spain is white, Italy green and Portugal Orange. Often CDS’s are referred to as being an indicator beyond reproach, but it is important to remember that this financial derivative which is barely over a decade old is actually a barometer in the sense of insurance premiums, and the market is not infinite, so at any given time there may not be a matching number of sellers v.s. buyers and the prices go up, Irish debt likely has …

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YTM: Yield to Maturity and Bond Pricing

Sometimes talking about present values, par and yield to maturity will catch even a well versed practitioner off guard, but to see a pricing model in action helps and that is precisely what this video does – in this clip an assumed future rate is discounted into present values and we arrive at the bond price. Well worth watching (twice!).

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Why I am an optimist by John Mauldin

John Mauldin sends out a weekly investment letter which has a readership of over a million people, the genius of his letters are that he doesn’t purport to know everything, luckily for him though he knows enough experts in enough fields who do, he draws on his knowledge and theirs to provide poignant and relevant financial interpretations of many events around the world but with a specific focus on the USA (he’s a Texan). Below is a recent letter that inspired me, so often we get caught up in news that we forget that the human race is an incredibly adaptable and innovative species. So I bring you John Mauldin’s thoughts, as to why he is an optimist, and I tend to agree….

Why I Am Optimistic About the Future

I am optimistic by nature. An entrepreneur friend of mine gave me a term that I have grown to love. She calls it “psychic income.” It’s that bit of hoped-for future income that is in our minds, that drives some of us, inflicted with the entrepreneurial gene, to do …

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Fixed rate price increases likely

We are going to look at the Euribor yield curve today considering its moves from 20th of June against two dates in August with a view to deciphering what it means for rates in the Irish residential mortgage market.

First of all we see that the June vs August lines on the 11th showed a drop in short term rates, this would normally imply an increase in liquidity (generally) as well as a lack of inflation expectation until circa the 2yr mark at which point the blue euribor line trends higher. We would take it that the expectation is for low rates to prevail for the next year then rise to about the 1.5-2+% range.

The prices changed from June to August and the implication is that sentiment changed from low short term rates to rising longer term rates to depressed short term rates and much higher longer term rates. This is a goldilocks scenario for the banks because they will be able to justify and earn large margins on the short …

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What did bankers do wrong exactly?

Sometimes I have to wonder where the blame-game changed course and the organisations with no commitment to societal well-being were burdened with that responsibility, while those with an inherent responsibility then moved into the realms of innocence in the whole fiasco.

Imagine if you will, a bold child being held responsible for eating all the cookies and spilling all the milk, that of itself is easy, and when you go to met out ‘blame’ you might focus on the child, but if this all happened while their parents stood idly by do you still focus on the child or do you apportion significant blame to those who have the responsibility of guidance and direction? Indeed, any person who understand the nature of a child will realise that they don’t really consider the wider costs of eating all the cookies and spilling the milk (such as depriving their siblings of same, no milk for the tea etc.).

So with this in mind I’ll turn to banking, commercial banks don’t have a moral code …

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Ireland is downgraded by S&P

We wrote about this in the past, the risk associated with a ratings downgrade to the country, and here it is laid out in plain English.

A downgrade on our rating from AAA to AA+ has the effect that everybody knows about, raising debt is more expensive, so in the past if we had to pay (for instance) 150 basis points over base to clear bond issuances then a downgrade will have you paying (for instance) 180 basis points as the market views your nation as being a higher risk [bear in mind that AA+ is not a ‘likely defaulter’ rating].

However, this has already been priced into our bonds for the most part as they all had to offer higher than average margins to clear, what the downgrade does do though, and the bit that I don’t see in the press and can’t figure out why, is to cause the enforcement of automatic international treasury rules.

What does that mean? It means that there are institutions the world over that have money …

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