Government Bonds

Sarenco said:
You could just as easily say that, with the benefit of hindsight, equities turned out to be a poor investment at the end of 1999.
Click to expand...
Well 2008 is actually a better analogy as that was a bigger crash than dot com, however equities don't have a maturity date like bonds do so you can wait for equities to come back, you can't do that with that 2031 bond it's return and interest rate is baked in , you are never getting 150 euros for that 100 euros bond invested in 2021. In fact every bond since then even is not compensating for inflation, the interest rates are too low on them all but not as extreme as that 2031 maturity.
I am just drawing attention to this as so many people have loads of bonds in their pension portfolios and they need to be made wise to why their so called "low risk" funds are losing money in this inflationary period.
 
joe sod said:
am just drawing attention to this as so many people have loads of bonds in their pension portfolios and they need to be made wise to why their so called "low risk" funds are losing money in this inflationary period.
Click to expand...
This is a very valid point and one wonders why any pension fund would buy that bond at issuance date at par But the govt needed to raise the funds. So is there some sweet deal at play...
 
Leaving aside default risk, there are two equal risks with all fixed-income investments: interest rate risk and reinvestment risk.

The former shows up when interest rates are higher than was the case when you invested, the latter when rates are lower.

But here’s the problem - when we invest we simply don’t know whether rates will be higher or lower when our fixed-interest investment matures.

Expected inflation is already baked into today’s bond rates. But expectations constantly change.

@joe sod appears to think that he knows better than the aggregate market consensus.

He might be right. Or he might be wrong.
 
When the Irish State borrowed by issuing bonds with very low coupons like 0.20% and even 0.00%, that was because the general short-term interest rate and longer term yields were very low.

For example, during 2020 and 2021.

The State could issue a bond at 0.50%, or even 0.00%, and sell that bond at close to par, to achieve a yield of under 1%.

See the example below, 10yr bond with 0.20% coupon, sold with a yield just below zero. But there were buyers in a queue to buy this bond!!!



1774630828073.webp
 
JoeRoberts said:
This is a very valid point and one wonders why any pension fund would buy that bond at issuance date at par But the govt needed to raise the funds. So is there some sweet deal at play...
Click to expand...


If I am the manager of a bond fund, I must buy some bonds.

If yields are really low, close to zero, I must still buy and hold some bonds.

Some DB pension funds want long-term bonds, to match their long-term liabilities.
 
JoeRoberts said:
This is a very valid point and one wonders why any pension fund would buy that bond at issuance date at par But the govt needed to raise the funds. So is there some sweet deal at play..
Click to expand...
There is to an extent i believe, the insurance companies and banks are by regulation forced to buy government bonds not necessarily irish though , but incredibly most irish government bonds are held by irish financial institutions. The fact that these institutions are effectively forced to buy government bonds means that the interest rates are lower than they otherwise would be in a free market. Then you had the central banks through "quantitive easing" also buying up those bonds to force the interest rates lower again and even negative.
 
I am not aware of any law or rule requiring commercial banks to buy Govt bonds.

What is the name of this law or regulation?
 
Protocol said:
am not aware of any law or rule requiring commercial banks to buy Govt bonds.
Click to expand...
After the financial crash they were required to hold more of their assets in safe assets (government bonds ) and not lend it out , the irish banks must hold more of their assets in safe assets (government bonds) compared to their european peers. Obviously a cash lodged with a bank by a depositer is an asset and a large proportion of this effectively is invested in government bonds i believe. Thats why they offer such lousy deposit rates.
 
joe sod said:
After the financial crash they were required to hold more of their assets in safe assets (government bonds )
Click to expand...
A few irish companies sold irish bonds as a result of the financial crisis, no one forced them to buy them, the Central Banks rules around capital requirements at the time was certainly a factor, although i recall someone from the Central Bank wondering why some had trimmed their irish bond exposure post the crisis!

To the best of my knowledge, no european insurance companies are required to hold government bonds but they are strongly encoueaged too in that the capital requirements are very attractive compared to most other investments, particularly equities.
 
Last edited:
joe sod said:
After the financial crash they were required to hold more of their assets in safe assets (government bonds ) and not lend it out , the irish banks must hold more of their assets in safe assets (government bonds) compared to their european peers. Obviously a cash lodged with a bank by a depositer is an asset and a large proportion of this effectively is invested in government bonds i believe. Thats why they offer such lousy deposit rates.
Click to expand...

I must check how much Govt bonds AIB holds, see their balance sheet below:

Their assets are 141bn.

I presume the holdings of Govt bonds will be in either note 15 or note 21.



1775736432701.webp
 
Note 15 to AIB's 2024 accounts. It's a trading portfolio?

Not much detail given here.

1775736559628.webp



Note 21 has more detail. I see Govt bonds worth 3bn.

They seems to use some of them as collateral. For what I wonder.



1775736681938.webp
 
Banks under ECB liquidity regs are required to hold "High Quality Liquid Assets" (HQLA) to cover a certain proportion of their liabilities. Central Bank deposits and government bonds usually represent a large proportion of the HQLA and that seems to be the case in the AIB Balance sheet above with CB balances of 37bn and government bonds of 5.25bn (FVOCI and amortised cost are accounting classifications). The decision on what mix of liquid assets to hold is determined by a number of factors: where government bonds trade (on a swapped basis) relative to the ECB depo rate and the accounting treatment, for example if bonds are held on an amortised cost basis the change in the mark to market value won't impact the carrying value or the bank's regulatory capital position.
 
I see bond yields rising again as a result of iran war and bond values falling. However the stock markets have mostly recovered from the iran war shock and are not down that much overall. This is because it is an inflationary shock and bonds are bad investments in inflationary periods like now.

Overall this has been a bad decade to be a bond investor, first the covid inflation, then ukraine and now this.
It is interesting though that central bankers like Christine Lagarde and others are trying to talk down the stock markets saying they are too optimistic on iran consequences and should have fallen alot more. This is very unusual for a central banker to be so vocal on the values of markets, what is her game?
Maybe she is looking for the stock markets to fall so that she can lower interest rates and relieve the sell off in bonds. If the stock markets rise and shake off iran shock then they will have to raise interest rates which is horrible for bond markets?
 
joe sod said:
It is interesting though that central bankers like Christine Lagarde and others are trying to talk down the stock markets saying they are too optimistic on iran consequences and should have fallen alot more. This is very unusual for a central banker to be so vocal on the values of markets, what is her game?
Click to expand...

Can you provide a link to her quote?
 
You must log in or register to reply here.
Back
Top