Saturday, 7 October 2017

The "wonderful" world of QE

From Almost Daily Grant's, October 5th 2017 edition:

Irish buys are smiling

Yesterday, the Republic of Ireland issued €4 billion worth of five-year debt, priced to yield negative-0.008%, in a deal that was 2.5 times oversubscribed. 

That feat, remarkable on its face, is made even more so in contrast to the Republic’s pronounced struggles during the 2011 European sovereign debt crisis.  Amidst an ailing banking system that lead to the demise of the 134-year old Irish Nationwide Building Society and forced the government to supply bailout funds to Bank of Ireland and Anglo Irish Bank to forestall a similar fate, Irish sovereign borrowing costs spiked to panic-type levels.  Yields on 10-year government debt jumped above 14% in the summer of 2011, with five-year yields reaching even higher to nearly 17%. Just over six years later, investors are clamoring to lose money (it’s a sure thing if the bonds are held to maturity) by financing the same country. 

Then again, buyers of this deal have an ace up their sleeve.  Perhaps a non-economic quasi-governmental entity which has bought more than €1.7 trillion of government bonds this cycle (per the FT) might be willing to buy them out a premium.

From Yields of 17% in 2011 to the current -0.008% (yes, that starts with a minus sign) in 2017, what a difference! Welcome to the "wonderful" world of QE (also known as "money printing") in which everything is possible and assets continue to rise in price. Ireland, once a member of the infamous "PIIGS" group, must be laughing all the way to the bank.

One day this will all end badly and buyers of these (any many other) bonds will scratch their head in disbelief why the heck they bought these instruments in the first place. But when that will happen, who knows?

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