Some weird goings-on in the Irish yield curve.
(Nicked from Frankfurter Allgemeine — the Ireland curve is the brown-ish one)
Last week a jump in Irish two-year bond yields turned the whole thing rather hump-shaped. The curve had already been steepening at the long end as investors fled the 10-year, but between Monday and Friday they left the short-end too.
It’s rather strange behaviour, given that tapping the European Financial Stability Facility (EFSF) would effectively protect bonds maturing until 2013. Talk of haircuts between now and then probably helped hump the curve — and would have been one of the reasons European leaders moved to issue that Friday joint statement.
The statement achieved three things, according to Deutsche Bank’s Gilles Moec:
First, reassuring the most bearish investors. By stating that nothing changes for the EFSF and more particularly that the EFSF does not involve the private sector, the statement dispels the notion – which had lately become popular on the markets – that triggering the EFSF was the prelude to haircuts for private bondholders between now and 2013.
(So down short-end of the curve)
Second, fleshing out a bit more clearly what investors may expect for after 2013, when the Greek rescue package and the EFSF expire. Indeed, among the “possibilities” for “the role of the private sector”, the statement does not mention haircuts (in contrast with German finance minister Schauble’s interview in the Spiegel on Monday). Instead, it mentions various lines of actions pointing to ensuring that the peripherals’ debt is rolled over after the expiry of the EFSF. The most contentious point, i.e. including collective action clauses on bonds issued after 2013 (which would have resulted in a significant extra risk premium on this new debt) is mentioned as a possibility, again not as a done deal as was the case in the interview of Wolfgang Schaüble in Der Spiegel on Monday 8 November.
(So down long-end of the curve)
In our view, the statement goes as far as was politically feasible to water down the project without embarrassing the German government too much. The European ministers’ statement does not contain a limitative list of the instruments available to the orderly restructuring scheme after 2013. The fact that haircuts are not mentioned there does not mean that they are indefinitely taken out of the negotiation table, and German Vice Chancellor Guido Westerwelle was quoted on Reuters in the afternoon of the release of the statement that “from 2013 private bond investors must take part in loss risks”. However, the vocal opposition of the ECB to the project – and we suspect the opposition of most Eurozone governments behind closed doors – is now backed by the reaction of the market over the last two weeks. Arguing for a tough restructuring scheme is going to be more difficult from now on.
(So, perhaps, back-up long-end of the curve).
If it sounds confusing, it’s because, well, it is. What’s more, triggering the EFSF — which Ireland is still fighting against – would, as financial consultant Achim Dübel notes, obviously end up acting as a support for short-term Ireland investors.
And leave longer-term ones with that lingering uncertainty. From Dübel:
The ESFS is an extremely distortive instrument as it fully protects bonds maturing until 2012 and leaves long-term investors – those that trusted the country most – in the dark. Essentially it is a subsidy to short-term investors.
Interesting policy there, Europe.
Related links:
Shorter-term bond yields – The Irish Economy
Bail-out fund stands by for first big test - FT
The illustrated burden-sharing for (Irish Bank) holders - FT Alphaville