Global Investing

Portuguese bonds staged an impressive rebound on the back of the European Central Bank’s cheap loan money flood in the first half of the year. The bailed-out country has managed the rare feat of being one of the best performing sovereign bond markets of the year so far with returns of over 40 percent for 10-year government bonds.

But the rebound was illusory in some respects because Lisbon had suffered more than most at the end of last year when some feared, prematurely at least, that the logic of the Greek debt restructuring would be applied to Portugal too.
And even if Lisbon has been praised for its efforts to cut its deficit, it is still considered the euro zone’s second riskiest country in terms of bond yields.

Richard Batty, investment director at Standard Life Investments, says:

“At the moment the premium suggests a big credit risk associated with holding (Portuguese) assets. Many of our clients have asked us not to invest in Portugal because sovereign bonds in places like Portugal and Greece are not risk-free anymore.”

Portugal’s 10-year debt is still priced as low as 65 cents in the euro on secondary markets compared to 93 cents for equivalent debt in fellow bailout member Ireland.
For Federico Sequeira at Exotix brokers, most good opportunities found in the first half are gone.

“At one point the sovereigns started trading at a very low level and people started investing when they realised Portugal’s problems were not as bad as that of Spain. Today you probably won’t find opportunities on the bond side … the moment everybody got involved the juice was gone.”

Watching how the mildly positive market reaction to this weekend’s 100 billion euro Spanish bank bailout evaporated within a morning’s trading, it’s curious to look at the timing of the move and what policymakers thought might happen. On one hand, it showed they’d learned something from the previous three sovereign rescues in Greece, Ireland and Portugal by pre-emptively seeking backstop funds for Spain’s banks rather than waiting for the sovereign to be pushed completely out of bond markets before grudgingly seeking help.

But getting a positive market reaction to any euro bailout just six days before the Greek election of June 17 was always going to be nigh-on impossible. If the problem for private creditors is certainty and visibility, then how on earth was that supposed to happen in a week like this? In view of that, it was surprising there was even 6 hours of upside in the first place. In the end, Spanish and broad market prices remain broadly where they were before the bailout was mooted last Thursday — and that probably makes sense given what’s in the diary for the remainder of the month.

So, ok, there was likely a precautionary element to the timing in that the proposed funds for Spanish bank recapitalisation are made available before any threat of post-election chaos in Greece forces their hand anyhow. It may also be that there were oblique political signals being sent by Berlin and Brussels to the Greek electorate that the rest of Europe is prepared for any outcome from Sunday’s vote and won’t be forced into concessions on its existing bailout programme. On the other hand, Greeks may well read the novel structure of the bailout – in that it explicitly targets the banking sector without broader budgetary conditions on the government – as a sign that everything euro is flexible and negotiable.

Just as global markets nurse a hangover from their Q1 binge on cheap ECB lending — a circa 1 trillion euro flood of 1%, 3-year loans to euro zone banks in December and February (anodynely dubbed a Long-Term Refinancing Operation) — there’s every chance they may get, or at least need, a proverbial hair of the dog.

At least that’s what Citi chief economist Willem Buiter and team think despite regular insistence from ECB top brass that the recent two-legged LTRO was likely a one off.

Even though Citi late Wednesday nudged up its world growth forecast for a third month running, in keeping with Tuesday’s IMF’s upgrade , it remains significantly more bearish on headline numbers and sees PPP-weighted global growth this  year and next at 3.1% and 3.5% compared with the Fund’s call of 3.5% and 4.1%.

In a week in which euro zone debt fears returned in earnest for the first time in 2012, a positive investment tip about one of the three bailed out peripheral euro economies was eye-catching in its timing. RBS on Thursday issued a recommendation to its clients to buy the bonds of one of Ireland’s main commercial banks Bank of Ireland.

Now, financial markets have for some time priced Irish government debt more positively that either Greece or Portugal, in large part due to the country’s superior private sector growth prospects and the government’s seeming acceptance of and adherence to the austerity targets demanded in return for European bailout funds.  That said, there is little end in sight to problem of banks bad debts and mounting mortgage arrears and few signs of recovery in a housing market where prices are down some 50 percent from pre-crisis peaks. Moreover, Ireland has scheduled a referendum on the new euro fiscal pact for May 31 and, if it’s rejected, the country could lose access to future euro emergency funds.

But, in a note entitled “The Celtic Tiger is coming back on track”, RBS credit strategists  Alberto Gallo and Phoenix Kalen took a positive tilt on developments and recommended investors snap up the 8.45% yield available on the senior unsecured bonds of  ailing, government-backed Bank of Ireland — the country’s “main viable bank”. The bonds mature in 2013 and had an original coupon of 4.625%.

Greece's creditors have essentially let it off the hook by overwhelmingly agreeing to take a 74 percent loss.  So what better time to  remember  one of the first times Athens got in trouble with paying its debts.

In 490 BC, the bucolic plains before the town of Marathon were the site of a bloodbath. Invading Persians  lost a key battle against Greeks, who were led by the great Athenian warrior Kallimachos, aka Callimachus.

The trouble is, Kallimachos shares some of the difficulty with numbers that  modern Greek leaders appear to have.  Before launching himself upon the  Persians,  he  pledged to sacrifice a young goat to the Gods for every enemy that was killed.

Guest blogger Gerard Fitzpatrick is portfolio manager at Russell Investments, where he runs a $5 billion global bond fund.

The views expressed here are entirely the author's own and do not constitute Reuters point of view.

The global economic outlook is positive overall, currently powered by China and America's twin engines of growth. Questions have been asked about the level to which the Japanese disaster may slow down the world's economic recovery, but in reality, it's expected to have only a small negative effect on global growth this year.

National Pensions Reserve Fund, born April 2001, died November 28th, 2010; survived by a sister, Nama.

 Irish Times wrote today an obituary for Ireland’s sovereign wealth fund NPRF, which was originally set up at the start of the last decade to plug future pension shortfalls.

But it never lived to fill this purpose. The 25-billion euro NPRF, which boasts its membership to the world’s elite SWF club, has died a sudden death although it has been suffering a capital haemorrhage last year, when the government amended the rule and used 7 billion euros to recapitalise its battered banks. The grim fate of NPRF also raised concerns about the viability of long-term capital: after all, sovereign wealth funds were billed as a provider of global financial stability as they invest in risky assets in the long-term.

It appears the penny has finally dropped in Washington.

Bank bailout watchdog Elizabeth Warren, chair of the Congressional Oversight Panel, has unveiled a report that outlines the perilous state of the U.S. commercial mortgage sector, which left unaided could spark “economic damage that could touch the lives of nearly every American”.

The Havard Law School Professor and her panel colleagues are talking the kind of apocalyptic language that may just shock the White House and its star policy advisers into facing problems banks have now rather simply obsess about those they may or may not encounter in the future.

Trying to second guess reaction to news during this financial crisis has been a fraught exercise and the U.S. Treasury may have a few advisers playing game theory to assess the impact of results from bank stress tests.

The tests are an attempt to determine which banks can survive more trouble, and who can’t. And how big any balance sheet holes might be. The results are due out on May 4.

If the results look too good, the process will look like a whitewash. Too negative, and it will destabilise still-jumpy markets. Yet showing up problems at one or a few banks could hang them out to dry.

Government-backed lending programs around the world have sparked a revival in financial and corporate borrowing — for now. Worldwide sales of corporate bonds rose to $251 billion in January, the highest level since May 2008, marking the first signs of a thaw after a long global capital markets winter. The following are the global sales totals and a list of the biggest borrowers, according to Thomson Reuters data.

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Top Temporary Liquidity Guarantee Program
(TLGP) Issuers Ranking Issuer Name Proceeds (USD) Market Share 1 BANK OF AMERICA CORP 32,628,557,500 23% 2 GENERAL ELECTRIC CAPITAL CORP 21,045,031,500 15% 3 CITI 17,726,150,000 12% 4 JPMORGAN CHASE & CO 16,176,202,500 11% 5 MORGAN STANLEY 14,324,084,000 10% 6 GOLDMAN SACHS 13,558,528,800 9% 7 WELLS FARGO & CO 5,996,490,000 4% 8 AMERICAN EXPRESS BANK FSB 5,247,235,000 4% 9 REGIONS BANK 3,497,682,500 2% 10 PNC FUNDING CORP 2,896,760,000 2% 11 SUNTRUST BANK 2,743,940,000 2% 12 HSBC USA INC 2,673,895,750 2% 13 JOHN DEERE CAPITAL CORP 1,995,380,000 1% 14 SOVEREIGN BANCORP INC 1,597,932,500 1% 15 KEYCORP 1,499,050,000 1% 16 NEW YORK COMMUNITY BANCORP INC 601,626,380 0% 17 ZIONS BANCORPORATION 254,892,000 0%

Corporate and Government Guaranteed Debt – Global Month Global Corporate Debt US Guaranteed Debt (TLGP) International Guarenteed Debt Total January 2007 317,575.6 317,575.6 February 2007 254,769.1 254,769.1 March 2007 315,515.9 315,515.9 April 2007 197,842.8 197,842.8 May 2007 336,817.1 336,817.1 June 2007 320,097.3 320,097.3 July 2007 123,559.2 123,559.2 August 2007 135,911.7 135,911.7 September 2007 221,778.5 221,778.5 October 2007 260,642.5 260,642.5 November 2007 156,442.8 156,442.8 December 2007 117,873.8 117,873.8 January 2008 203,028.2 203,028.2 February 2008 155,728.7 155,728.7 March 2008 147,390.8 147,390.8 April 2008 303,897.8 303,897.8 May 2008 357,243.5 357,243.5 June 2008 219,317.5 219,317.5 July 2008 133,174.8 133,174.8 August 2008 125,650.0 125,650.0 September 2008 106,030.8 106,030.8 October 2008 68,402.9 4,869.0 73,271.9 November 2008 116,849.8 20,079.9 9,955.9 146,885.6 December 2008 102,066.7 87,768.5 4,050.5 193,885.7 January 2009 251,013.0 46,493.8 19,665.9 317,172.7