Take a look at the recent history of the financial performance of the Discretionary Fund in our National Pension Reserve Fund (NPRF), taken from the 2009 Annual Report
The Discretionary Fund is to be distinguished from Directed Investments which are investments the NPRF is directed to make by the Minister for Finance and have particularly applied to recent investments in the banks.
Add in the 11.1% return in 2010 on the Discretionary Fund and we have a simple total return of 45.9% over 10 years or a simple average of 4.59%. Hardly spectacular but we are assured by the NPRF that it has outperformed the average of private Irish pension funds during that period.
So a simple average return of 4.59% per annum. Yet this morning, the return on our 3-year sovereign bond is 12.4%. Sovereign bonds are one means by whichIreland borrows money so that it can fund the annual budget deficit (the difference between what the government takes in tax less what it spends, mostly on the public sector and social security). There has never been a suggestion, not even by Sinn Fein who possibly take the most contrarian view on bonds, that we should default in any way on our sovereign debt. That being the case, you might have thought that whatever funds we have left in the NPRF might be more productively used in buying our 3-year bonds (I have chosen three years because it is medium term debt – longer and shorter term funding is generally yielding returns in the same ballpark). After all, we would see a guaranteed return which was some 200% more than the simple average return achieved by the NPRF in the past 10 years.
The Irish Independent today reports thatGreece has been doing exactly as suggested above – buying back its own bonds, to the tune of €2.3bn since the start of this year. The Independent goes on to report “last night, National Treasury Management Agency sources said thatIreland had not made any such purchases this year.” It is unclear, to an extent, how much cash the National Treasury Management Agency (NTMA, responsible for managingIreland’s debt and associated functions, including the oversight of the NPRF) has to play with at present. Our Minister for Finance, Michael Noonan seems to be performing the dance of the seven veils with recapitalizing the banks, which our stress tests last month showed would require €24bn. Possibly the Minister sees delaying the injection of the €24bn as one of the few remaining aces in Ireland’s hand as the country seeks to renegotiate the interest rate and terms of the bailout funding. However it would seem that we have a few billion euros available, at the very least.
So at the current rates, should the NTMA be buying Irish bonds? If not, at what rate does the purchase of Irish bonds become irresistible? 15%? 20%?
NAMA Wine Lake 
Basic question time:
Is this all notional until we hold another auction?
Forgive my rusty economic bond theory but the higher yield merely represents the lower price, doesn’t it?
The Government isn’t actually paying anybody the guts of 11% for bonds right now but 11% in the secondary simply represents the % discount on the bond’s face value.
EG: 10 year Bond worth 100e had an inital yield of 5%
Now the bond can be purchased for 50e so as well as the 5e interest you get per year you also get a bonus 50e after 10 years. So on average you now get 10e per year so technically the bond yield is 10%?
Sorry for that overly long question (rant)
@Rob S, because we are not auctioning bonds at present, then the NTMA/NPRF would need contact the secondary market dealers like the rest of us if they wanted to buy Irish sovereign bonds today. I don’t know how liquid the market is but we do have quite a large volume of bonds in issue so presumably the market is reasonably liquid, especially if you’re a buyer.
You are correct to say the government isn’t paying the interest rates suggested by the market at present, but the rates suggested by the market will be what is paid to you or I or the NTMA today if we buy bonds on the secondary market. And that is because we will buy the €100 face value bond and pay less than that for it.
Not only should the NTMA have been buying bonds, but the banks should have been encouraging the borrowers to buy bonds and set them off (in the legal sense) against their liabilities. It would have solved two problems in one go – deleverage the banks), and resolve the debt of their customers).
But hey, we have teachers, civil servants etc. running the country, and bankers who have amply demonstrated that they don’t have a clue.
Maybe the teachers should go back to the day job, or even back to school?
Wouldn’t it also be a good idea for our Pillar Banks to get involved in purchasing Irish Bonds on the secondary markets using ECB funding @1.25%? What better collateral could the ECB get than Irish Sovereign Bonds?
Why not go Greek and double your money in less than three years? That would solve everything. And, I kind of get the idea that is what Bernarke is trying to do with commodity prices and the dollar, but that is another topic. Joking aside (about the bonds, not Ben), obviously, the market thinks there are very real possibilities that the sovereign will not comply with all the rules in the contract. Remember the Brady bonds? I can see some O’Brady bonds coming down the pike.
The government are funding the private sectors savings desires. Irish people own about 7% of their “own” national debt. In Japan the equivalent figure is ~98%. The interest on the debt would stay in the country if these geniuses had a clue but no they would rather expand the current account deficit through the flow of interest payments abroad. In Japan they still issue their own liabilities unlike Ireland who use a foreign currency. Irish debt is risky and should be compared to the individual states in the US, not compared to real sovereigns like the UK/US and Japan. Those yields are not going to come down anytime soon if ever.
NWL, I am confused by this post.
Could you please explain how the NTMA buying bonds from the Irish Government differs from an individual buying credit from themselves?
@OMF, I’m a little confused by your question! Perhaps illustrating the principle might assist.
Up to September 2010, the NTMA issued Irish sovereign bonds with various redemption dates – the 10-years bond gets a lot of publicity but bonds have been issued with various redemption dates.
Fast forward to today and the say the NTMA/NPRF are examining investment options for the funds that they hold on behalf of the State. They could invest €100 in equities and the like and on past experience that will generate about 4.5% per year. They could also buy their own sovereign bonds on the secondary market and let’s say the seller is a foreign investor, say Deustche Bank to make it realistic and DB will sell €120 face value of Irish three year bonds to the NTMA who will pay €100 to DB for them. So what happens this year? All that happens in 2011 is that the State (the NTMA) will not need pay DB any interest on the bonds and the interest would have been about 5% on €120. So the State saves €6 this year and next year and the year after. And in addition, in 2013 the State will only need pay €100 to redeem the €120 of face value bonds from itself. So the State saves €18 in interest over three years and saves itself €20 on the redemption of the bonds.
Is the State buying back its own debt? Yes it is. At a substantial discount.
@NWL
Thanks, just making sure I got by calcs right
@OMF
If the NTMA can buy back a loan for 50e that they sold for 100e a year ago then it is good business surely?
If you are holding Irish debt right now and are teribly afraid of default then you may be happy to sell it back to the NTMA for a % discount as they may be the only buyer. Gov gets to discount without default.
Sorry, probably didn’t answer your question.
Nama’s bought about E50m of short-term Govt bonds, according to Irish Times earlier this month. Bought them in secondary market. Would have thought we should have been doing this on a huge scale.
I think that some care is needed here as if I may be so bold you need to think through the consequences of the NPRF buying Irish government debt. I am aware of the Greek purchases of its own debt and believe that it will turn out to be a mistake for which sadly no-one will get punished ( as opposed to the other way around if it had been a success when many would have basked in the credit!)
If you assume that the Euro zone rules will remain as they are then you need to buy a bond which matures as near as possible to when the European Stability Mechanism starts. This is because it is the time when under Euro zone rules default by Ireland, Greece etc. becomes a possibility under the rules and because of the circumstances becomes in my opinion a near certainty.
The nearest bond to this Ireland has is the 5% coupon which expires on the 18th of April 2013. Because it’s closing price was 89.03 tonight then in addition to the interest in theory you get a capital return of just under 11 points when the capital value is repaid in just under 2 years. So the gross redemption yield is 11.59% according to the NTMA.
So should the NPRF buy as NWL suggests? It seems so attractive but forgets in my opinion several things.
1. That Euro zone rules have to remain the same. Against this they have changed several times already so there is no certainty. Also if you think about them they are in essence a fantasy.
2. In my opinion both Ireland and Greece will have to face some form of default be it soft or hard. Now if we take the version which George Soros suggested for Greece this had two principles.
a) A reduction in the coupon paid
b) An extension of the maturity date
So the redemption yield offered has the danger of losing some of the coupon but also finding the redemption date and the return of the capital value of 100 moving further away possibly quite far into the future. Accordingly the yield looks much less attractive.
3. I am afraid that the arguement that Ireland’s political class is not considering this is not especially relevant on two counts. First they have had to do many things so far that they would not have considered only a brief time before. Second and I am wary of saying but I am afraid it is true, Ireland at this point is not in full control of her own destiny.
So whilst it may look attractive my understanding of the NPRF mandate is that it should look for the best international returns and not just look at Ireland.
In practice I feel that Greece will likely be forced into some form of default maybe as soon as this summer and at that point the pressure on Ireland to do the same will increase and increase…. Then you may need the NPRFs money.
So you delete and prefer to dream on, what about the LT2’s of the credit unions, the guarenteed losses through mortgage trackers and the already pledged investments of the NPRF?
@someone, comments that break posting guidelines are suppressed and you were sent an email explaining why that happened, and inviting a slight modification so that the comment would be published. Not sure what point you are making about LT2s (Low Tier 2 securities?) in credit unions or losses on tracker mortgages. But as to the commitments already made for NPRF/NTMA funds, I did draw attention above to the fact that the timing of the €24bn additional recapitalisation is still unclear.