Key Post A rough year

[joe sod]

Nah. Bear market rally. Look at what's happening in the credit markets and in global stocks.

what do you mean, did not the irish government sell more 10 year bonds with a puny 1.1% yield in the last week and it was way oversubscribed?, and irish bonds are hardly the safest out there with the very high irish sovereign debt yet they still got them away at such low yields.

 

[opexlong]

Sorry joe I should've been more specific - I mean illiquidity and volatility in the high-yield bond market. No new issues for five and a half weeks until two days ago according to FT.

The Nasdaq and Russell were in a bear market two weeks ago, so any sub-normal market activity ought to be setting off alarm bells. (Bear market rallies historically can last 2-3 months, so we don't really know if we are still in a bear market or not. We could easily be.)

and irish bonds are hardly the safest out there with the very high irish sovereign debt yet they still got them away at such low yields

The mispricing of bonds helps to increase the very risks to financial stability which haven't been properly priced in (in a sort of reflexive cycle), in my opinion. We don't have a great track record with throwing caution to the wind in this country.

 

[joe sod]

The mispricing of bonds helps to increase the very risks to financial stability which haven't been properly priced in (in a sort of reflexive cycle), in my opinion. We don't have a great track record with throwing caution to the wind in this country.

so irish sovereign bonds should have a higher interest rate if the real risk was priced in. But is it not the case that many people are staying out of the stock markets but as a result their money is being invested in "low risk" funds invested mostly in bonds (but paradoxically their money will be invested in these very same "mispriced" irish sovereign bonds among others).

 

[Gordon Gekko]

My sense, for what it’s worth, is that the stability we’ve seen in bond markets (despite the scaling back of QE) suggests that things are better than one might infer from the weakness in equity markets.

I’d certainly prefer to be long equities during 2019 rather than sitting in cash or short the market.

 

[RedOnion]

"mispriced" irish sovereign bonds

Joe, out of interest, do you think that long term sovereign debt in general is mispriced, or do you think Irish debt specifically is mispriced relative to other bonds of similar duration as the risk is not properly priced?

 

[joe sod]

Joe, out of interest, do you think that long term sovereign debt in general is mispriced, or do you think Irish debt specifically is mispriced relative to other bonds of similar duration as the risk is not properly priced?

I dont know to be honest, I dont own any bonds. I just know that the quantitive easing program by the european central was specifically set up to buy european government bonds and create an artificial demand for them that was not there before. Therefore the interest rates reduced considerably compared to what they would have been without quantitive easing. I am amazed that everybody seems to think that quantitive easing caused a stock market bubble but the ECB did not buy stocks they bought government bonds especially the most risky european sovereign bonds.

 

[galway_blow_in]

Joe, out of interest, do you think that long term sovereign debt in general is mispriced, or do you think Irish debt specifically is mispriced relative to other bonds of similar duration as the risk is not properly priced?

Often heard it said that the bond traders are the smartest guys in the room, was listening to an interview this morning on the Richard curran show with a former smurfit kappa high ranking executive who currently works for paddy Power ( didn't hear his name during segment I heard)

Smurfit kappa went as low as a euro per share in 2009 but he claimed that the debt made investors even more money, same thing happened with those who bought Irish government debt circa late 2010

 

[joe sod]

same thing happened with those who bought Irish government debt circa late 2010

but they were still taking on alot of risk, ireland was basically bankrupt in 2010, there was no guarantee those bond holders would be paid. What about the guys that bought icelandic sovereign bonds, they got burnt, that does not look too smart now and ireland was basically in the same place as iceland back then. I doubt the guys buying irish sovereign bonds today and only getting 1.1% yield are very smart, that looks pretty dumb in my book.

 

[galway_blow_in]

but they were still taking on alot of risk, ireland was basically bankrupt in 2010, there was no guarantee those bond holders would be paid. What about the guys that bought icelandic sovereign bonds, they got burnt, that does not look too smart now and ireland was basically in the same place as iceland back then. I doubt the guys buying irish sovereign bonds today and only getting 1.1% yield are very smart, that looks pretty dumb in my book.

Didn't say it wasn't risky but it certainly was rewarding, many would have offloaded what they originally bought when yields were 10%

 

[RedOnion]

I doubt the guys buying irish sovereign bonds today and only getting 1.1% yield are very smart, that looks pretty dumb in my book.

Is that not a bit of a strange comment from someone who couldn't answer my question yesterday about whether the interest rate risk was wrong, or the credit risk spread?

So go on, what makes it dumb in your book?

I'll make the question easier for you. Are the guys buying German 10 year debt with a yield of 0.2% also dumb?

 

[joe sod]

I'll make the question easier for you. Are the guys buying German 10 year debt with a yield of 0.2% also dumb?

Im not an expert in bonds, and Im not that precious about it either, i dont think the guys buying the bonds are themselves dumb, they are probably well educated and know all the ins and outs etc. However I think they are making dumb decisions to lock in money for 10 years for only 0.2% yield. These guys are not independent they are making decisions based on group think and the anathema to risk that exists in the financial and banking world following the 2008 financial crash.

 

[Gordon Gekko]

It’s naive to describe the buying of German bonds at 0.2% as dumb without knowing what the buyer is trying to achieve or is mandated to achieve.

Also, only time will tell whether 0.2% is good or bad over the time period in question.

 

[joe sod]

It’s naive to describe the buying of German bonds at 0.2% as dumb without knowing what the buyer is trying to achieve or is mandated to achieve.

Also, only time will tell whether 0.2% is good or bad over the time period in question.

Fair enough, but people get criticised all the time about equity investments and whether they are good value or not even on this thread but there seems to be a bit of preciousness about bond investors as if they can never be wrong. Did not the ECB through its bond buying program artificially depress the interest rates on sovereign bonds, that was their intervention in the financial markets, it inflated property and bond prices throughout the EU but actually not the equity markets. I think it is dumb to be buying an asset that the ECB has created a huge artificial demand for.

 

[RedOnion]

I think it is dumb to be buying an asset that the ECB has created a huge artificial demand for

It's basic supply and demand. They've created an artificial demand for every asset class.

By buying bonds (ECB didn't just buy government bonds), they increased money supply. It's difficult to assess how much impact this has had on any asset class, but if you think an increased money supply hasn't impacted on equity values, you don't know what you're talking about. By pushing money market yields lower (and negative), investors with the rusk appetite have moved to 'risker' assets to seek a positive return. How you accept it's impacted property, but not equities, is beyond me.

In terms of investing funds in 10 year bonds, there aren't much options at the same risk levels. German bonds are returning a negative yield all the way past 5 year term at the moment. It's not like these guys can take the money out at an ATM and keep it under their mattress.

There's a lot of money floating around - call any of the banks to put 100 million on deposit, and see how quickly they tell you they don't want it, or offer you a negative rate for 2 or 3 year term.

 

[joe sod]

By buying bonds (ECB didn't just buy government bonds), they increased money supply. It's difficult to assess how much impact this has had on any asset class, but if you think an increased money supply hasn't impacted on equity values, you don't know what you're talking about.

but european equities are lower than they were in 2015 when the ECB quantitive easing began, i will concede that without it maybe european equities could have been lower. The direct intervention by the ECB was in buying bonds not equities!
But the booming asset values have been in bonds and property because of the "supposed" risk aversion of most investors today which also explains the 100 billion in irish deposit accounts which is being eroded away. The banks dont want the 100 billion as you say because they are also risk adverse (following 2008 and the bollicking they got for that) that is why they are going out and buying the german bonds at 0.2% and irish bonds at 1.1%. Im saying they are wrong and the depositors lodging their money with them are also wrong. Of course in the short term they maybe right like the last 6 months but in the next few years they will be wrong.

 

[RedOnion]

The banks dont want the 100 billion as you say because they are also risk adverse (following 2008 and the bollicking they got for that) that is why they are going out and buying the german bonds at 0.2% and irish bonds at 1.1%.

I have to point out that the Banks that are holding the 100bn in Irish household deposits are not the ones buying 10 year debt.

Im saying they are wrong and the depositors lodging their money with them are also wrong. Of course in the short term they maybe right like the last 6 months but in the next few years they will be wrong

You do realise there are ways to 'put your money where your mouth is' as it were, if you really believe this, and make money if you're right?

 

[joe sod]

@RedOnion I have put my money where my mouth is, most of my disposable wealth is in equities, only about 10 percent is in cash. It's just my opinion lots of people have opinions on lots of things here. I just think you might be slightly touchy about my criticism of people holding most of their wealth in cash and bonds earning nothing and even being exposed to a lot more risk in the case of Irish bonds than the interest rates would suggest. Even Warren Buffett said that he would never invest in bonds in this year's investment letter

 

[RedOnion]

I just think you might be slightly touchy about my criticism

Not at all Joe. Your earlier posts are written as statements of fact. I was trying to establish whether or not you knew what you were talking about.
I have my answer.

 

[Sunny]

You are assuming that bond investors are only interested in one thing and that is return. Demand for bonds is driven by numerous things. Insurance companies and pension funds have no choice but to buy them even with negative yields. Money market funds are obliged to hold short term bills. Banks are required for regulatory reasons to hold a certain amount of liquid assets and there are many banks who would rather invest an Irish Government Bond rather than stick hundreds of million in cash with another bank or get negative returns from the ECB. Banks will use government bonds to access funding through the repo market. Equity portfolios will use bonds to reduce the volatility of their portfolio.

You might not see the sense of investing your money in a Irish government bond yielding 1% for 10 years but that doesn’t mean the people who did buy the debt are stupid. If for whatever reason they needed to buy 10 year bond, the decision then is the does the yield on Irish debt adequately compensate them for the perceived risk versus German bunds. That’s the question you need to ask. Are Irish Bonds overpriced versus German bonds. Not if all sovereign debt is overpriced.

 

[WhiteCoat]

….pension funds have no choice but to buy them even with negative yields. .

Hi Sunny,

Very good post. I just don't understand this bit. Are you saying that pension funds are compelled to buy bonds? If so, why and by whom?