It appears that Ireland’s ability to borrow money is becoming much more impaired in the past three months, looking at the 10-year yield on their notes (note that the chart is the spread between the German and Irish 10-year sovereign debt, not the absolute yield to maturity of the Irish 10-year note; Germany’s 10-year debt yields roughly 2.4% at present):

The absolute yield to maturity is here:

Observers should note that during the Greek bond crisis (which peaked in early May 2010) that yield spreads on the same Irish notes went up from roughly 1.3% to 3.0% before trading at a range of roughly 1.6% to 4.5% before this wave of relative selling hit. This corresponds to a yield to maturity on Irish debt of roughly 4.4% to 5.9% and 4.6% to 6.7% after the Greek debt crisis.

Something else to note was that US treasuries were recipients of capital inflows during the Greek debt crisis, which apparently is not happening right now.

I have no further insight other than what is making the news right now, which means it is not tradable information. But it is something to be aware of – there may be another European sovereign debt crisis coming down the pipeline. If a yield spike hit the US government debt market, it would make major financial headlines. There is no telling whether the 50 basis point run-up in the last month is the start of a 5% rise in yield, or whether it is market noise.

The chart of the 30-year treasury bond clearly shows an increasing yield since roughly early October:

Yield is up from roughly 3.65% to 4.25% presently. Will this trend continue? It seems the market is starting to price in long-run inflation, especially when contrasted with the 10-year yield:

Yields from early October is up from 2.50% to 2.66% presently.

It is very difficult to trade a bond market when the environment is so explicitly manipulated by large players (the Federal Reserve being one) – there is a lot of money to be made predicting their next move, but from the retail end it is very difficult to judge since there are a lot more informed participants in the bond market.

One consequence of increasing bond rates is that the price of obtaining long term corporate debt will rise. On the 10-year the rise doesn’t appear to be much above ambient noise levels, but there is clearly something going on in the 30-year.

Historically, however, 10-year yields are trading at relative lows.

With all the talk of the US Federal Reserve performing another round of quantitative easing (which amounts to repurchasing medium and long-dated government debt securities in an attempt to lower long term interest rates and frustrate people into purchasing anything else where they can get a decent yield on cash), the markets have started to get a bit antsy on the macroeconomic front.

Since the strength of the US dollar is a huge global variable, whenever the US Federal Reserve does something, the rest of the world, including domestic US investors, will notice. And indeed, the world has reacted by tanking the currency. More interestingly, however, is the rise in treasury yields (lower treasury prices):

In theory when you have the full force of the US Federal Reserve behind a position (in this case, purchasing government bonds), you try to get out of the way. This time, the market’s reaction appears to be one of indigestion – an exit from bonds. This is very interesting and if the trend continues, will have huge ramifications on investor’s calculations as to what exactly constitutes a “risk free rate”.

It is increasingly clear that US government debt is not as “risk free” as people may think, and this risk should be appropriately adjusted in financial calculations.

The easiest way for an investor to directly take a stake in this (other than buying or shorting treasury futures, which is a relatively trivial transaction to perform) is to buy or sell units in NYSE: TLT, which is an ETF that contains long-dated treasury instruments of 20 years and above. TLT is down about 8% from two months ago, when US Treasury bonds were trading at a local minimum of 3.5%. During the pits of the economic crisis, the US Treasury bond traded as high as 2.5% as investors dove for the safest haven.

A question in the financial markets should now be – exactly how safe is the “safest haven”? If the answer is anything other than US government debt, this would explain the currency exodus.

As a comparison, Canadian long term benchmark yields have generally gravitated down from August – reaching a high of 3.72% in August, and currently trading at 3.45%, and a low of 3.33% seen in late September. Clearly, the crisis hitting the US bond market is not hitting the Canadian bond market, at present.

My perception is that if this is the beginning of a “run” on US long term debt, there will be huge financial ripples in the US marketplace – for example, what do you do when you see a corporate long-term bond trading at a yield of 7%, when the 30-year US government debt is trading at the same yield? We are not there yet, but rising US government bond yields will crush the corporate debt market window that is currently open.

Watch out, because I suspect things are getting exciting again.

I’ve been scanning the entire list of exchange-traded debt and asset-backed securities, and the number of securities that are trading at a substantial discount to par you can count with the fingers of one hand.

On the US side, you have subsidiaries of Ambac, AIG, and SLM Corp.

On the Canadian side, you have Clearwater Seafoods, First Uranium, Holloway Lodging REIT, Lanesbourough REIT, Newport Partners, Priszm, Royal Host and Sterling Shoes.

All of these companies have significant issues, so an investment in the debt of any of these issuers involve a substantial amount of risk, including their ability to refinance. Right now is the most debt-friendly time to finance, so one wonders what would happen in the event of a slowdown in the debt issuance market.

Via James Hymas, Fairfax Financial is issuing $250M in preferred shares, with a 5% yield, and 2.85% above 5-year government bond rates thereafter, and the (holder’s) option to convert to preferreds yielding a floating rate of 2.85% above 3-month government treasury bill rates every five years.

5-year government rates were 2.16% on September 24, and the 3-month note rates were at 0.90%.

Cheap, cheap financing. As issuers start to pound away on the fixed income side (due to heavy demand), it makes you wonder when the party will end. My strong impression is that companies should be extending maturities and securing their debt financing since rates right now are about as good as they will get due to such voracious demand for fixed income securities.

I don’t like calling tops and bottoms – it is nearly impossible to get the exact time correct, but it is possible to get close. The way you take advantage is by scaling in your orders and waiting for the executions.

Trends in the marketplace go on further than anybody usually expects. Fixed income securities (especially bonds) appear to be quite pricey at the moment. Also, I have been noticing a lot more sentiment on the retail side toward dividend-bearing equities, and doing a cursory scan on that side of the marketplace leads me to believe that performing screens on non-income bearing securities would bear more fruit at the moment.

Portfolio movement has been mainly selling securities and raising cash, due to lack of research time. In particular, there is quite a bit of US currency available for deployment, and it is has been nearly a year and a half since I have invested in US equities.

Yield is now down, but I am very liquid.

I notice that a certain local credit union is advertising a 5-year fixed mortgage rate at 3.45%, which is a very low rate considering it is about 125bps above government benchmark bond rates. Since the overnight rate is now 1%, they will not be making much margin on the transaction. This also implies they have confidence in the price stability of the local real estate market, and being in the Greater Vancouver area, makes you wonder whether this is a valid assumption.

Something that is not easily discovered is their loan criteria – for example, if getting such a rate required a 40% down payment, then the rate might be warranted since the bank would have recourse and recovery in the event of a mortgage default.

Looking at the variable rate market, the best rate I can find is 0.85% below prime (prime is currently 3.00%), but if other institutions are over-capitalized, this discount to prime will continue to increase as they compete for loans. It makes you wonder whether consumer demand for debt has slowed down.

If you put a gun to my head and forced me to choose a mortgage that would result in the lowest interest paid over a 5 year term, I would still go for the variable rate. However, that said, 5-year mortgage rates cannot go much lower than 3.45% – maybe down to 3%, but that’s about it before you really question the sanity of financial institutions offering loans at that rate.

There is some risk of short term rates rising even further in 2011 and 2012, but it doesn’t seem like such movement would be extreme if it did occur. For financial modeling purposes, the market is saying that the 2011 increase will be 0.43%. There are scenarios where this rate could skyrocket, and also scenarios where the short term rate goes back to 0.25% again (where sitting on a prime minus 0.85% mortgage is really inexpensive!).