It seems to have gone unnoticed in the Irish media on Thursday as the aftermath of Budget 2013 dominated the headlines and airwaves. But on 6th December, 2012, the National Treasury Management Agency (NTMA) announced that it had bought back €500m of the 5% Treasury Bond which was due to mature four months hence on 18th April 2013. The NTMA gave no reason for its action save to say “as part of its normal operations in the secondary bond market the NTMA has acquired holdings of this very short dated bond which it has now decided to cancel.”
“Normal operations” at the NTMA in the past have not included buying back debt, at least a review of press releases for 2012, 2011 and 2010 indicates this to be the case.
It is interesting that the NTMA which is funded by the Government has used a funding pool which includes the €67.5bn external programme finance from the Troika of the EU, ECB and IMF, to buy back bonds. Although the notice from the NTMA published on Thursday refers to “Treasury Bonds” these were long term bonds issued in January 2002, and there were €5.6bn of these still in issue. Thursday’s announcement means this has reduced to €5.1bn.
The NTMA has come in for some criticism on here in recent months for issuing billions of debt which is not immediately needed, and in fact shouldn’t be until the end of 2013. And the cash raised has been stuck on deposit at the Central Bank of Ireland where it earns 0.09% per annum – and no, there’s no decimal point missing here, it earns the negligible “Euro Overnight Index Average as set by the European Banking Federation on a daily basis”
Thursday’s action should save about €9m being the difference between €500m at 5% per annum for 133 days and €500m at 0.09% per annum for 133 days.
But is Ireland now pursuing a strategy of buying back debt and if so, why not issue €5bn of 3-month treasury notes paying about 0.5% per annum and buy back the rest of the April 2013 issue, that would save €90m.
Perhaps we’re more like Greece than we previously made out…
We are very different to Greece in this regard. For a start holders of the bond may not be willing to sell. The NTMA could offer a higher price to encourage them but there is no point as it can’t really save money.
You are comparing the coupon on the April 2013 bond to the yield on three-month Treasury bills. You should be comparing the yield on both. The April 2013 bond is currently yielding around 0.5%. To buy €100 of this bond now costs around €101.50 and the seller would have to be paid around €3.25 for the interest accrued since the last coupon date.
That is paying €104.75 for something that will be worth €105 in April. The numbers are rounded but that is the annual return of 0.5%. I
f the bonds were trading below par then there might be some value in it provided you get can someone to lend to you at an interest below the yield on the bond you are trying to buy. But if Irish bonds were trading below par we would not be able to issue 3-month Treasury Bills at 0.5%.
Issuing Treasury Bills at 0.5% to buy something yielding 0.5% over the same term would simply mean a loss because of the transaction costs incurred.
I don’t know why the NTMA bought the bonds during the week. It might have saved some money but I doubt it. The difference between the 0.5% yield on the bond and 0.1% return on deposit would be reduced by transaction costs.
The reason Greece is undertaking a buyback is because the bonds are trading at a large discount relative to the par value. If Greece can borrow at say 4% and buy bonds yielding 20% then it can make a saving. We have no scope to do that.
interesting to know “which” pocket the money came from,are sources of funding comingled……someone posted something about articles or treaties recently…..
Coupons don’t equal yields. Lots of other incorrect assumptions being made as regards “normal operations”, timing, potential savings, how the bond market actually works etc.