Strange bond market behaviour?

Submitted by Edmund Gall on Thu, 04/01/2010 - 07:00

While everyone is focusing on the amount of borrowing the T&T government is undertaking, with it's latest bond flotation, I'm wondering about how the T&T market makes financial decisions.  According to the article:

"On February 9, the auction of the Government’s US$600 million 15-year 6.50 per cent bond was also oversubscribed, with total bids received amounting to US$2,087.641 million."

Presuming this is a fixed rate bond, that means the government will pay 6.5% fixed per year of your initial investement, for each of the 15 years.  So in total, an investor would receive at the end of the 15-year period their initial investment plus (15 x 6.5%) = 97.5% in interest.

Now, if you go to the Central Bank's website, you can download the monthly price indices going back to 1991.  So, since this is a 15-year bond, let's compare the retail price index (all items) of Jan 1995 (72.1) with Jan 2010 (161.9).  The basket of items you bought in Jan 1995 would cost you more than double the amount in Jan 2010 (161.9 / 72.1 = 220%); in other words, the Jan 2010 basket cost varies from the Jan 1995 cost by 120%.

Now, if this same bond was offered in Jan 1995, investors would have actually lost money in real terms in Jan 2010 since the 97.5% interest would be less than the 120% loss in value due to inflation.  I know the past is no guarantee of the future, but who in their right mind would buy such a bond?  Well, a lot of folks, it seems, since the bond was oversubscribed.  Can anyone explain what I'm missing?

Blog: 
TT government bonds

Comments

Submitted by Twitter Trackb... (not verified) on Thu, 04/01/2010 - 07:14.

[...] Strange bond market behaviour? | KnowTnT.com (Beta) www.knowtnt.com/node/134 – view page – cached While everyone is focusing on the amount of borrowing the T&T government is undertaking, with it's latest bond flotation, I'm wondering about how the T&T market makes financial decisions. According to the article: Filter tweets [...]

Submitted by From Foreign (not verified) on Thu, 04/01/2010 - 17:49.

...which paid well but was not really the most secure of business interests, yet you wanted to have a legitimate nest egg for your siblings - delivered by a trustworthy entity at that future time, maybe you may look at bonds. Losses are negligible for the underground economy .
My own friends who have roomfuls of money, so much it requires weighing actually, find this to be great mechanism to stabilise the robber baron label. Accommodating them is merely good survival governance.

Submitted by Edmund Gall on Thu, 04/01/2010 - 20:02.

Thanks for your response.  I know government bonds are treated as one of the safest investments because it is extremely rare for a government to default, i.e. not pay the interest and principal on time when due over the lifetime of the bond.  But does that mean that an investor is willing to get a return that is potentially a loss in real terms as a price for this safety?

Submitted by From Foreign (not verified) on Thu, 04/01/2010 - 23:22.

forget my quip about the money weighers - legit money managers, especially in this new climate POST WALL STREET, POST CLICO must balance their portfolios - i imagine in the buy/sell/resell/hedge/sell world it makes sense .. It may be worth it to see who is buying whose debts.... offshore.

I do believe tho there's a point for those whose money machines are so well oiled its not about interest , more about just not losing the revenue from the machine when the funds are placed outside their personal confines .

in our economy where crookedness is the norm - marginal profits as per legal, ethical and old school is just not the way T&T does business. To delve into it is to liken the student trying to tell weather by peeking the Stevenson screen, monitoring a barometer but the old salt just looks at the clouds...!!

In my job I put out spin for the new rich guys who fund the politickers and they seem pretty much entrenched in the money markets..I've yet to fnd a really new rich guy who adheres to the 10 commandments or even the standard fiscal rules.

Submitted by Edmund Gall on Fri, 04/02/2010 - 04:54.

... Thanks again for your response.

It's raised another query in my mind.  Looking at the amount floated in bonds, I'd assumed that pensions or other fund managers would've been the majority of the investors.  I didn't think about the individual investors, which in recent decades may have increased in number.  I wonder if investors are almost forced to accept whatever interest rates are offered because (1) they desire to invest on the local market, and (2) there isn't a huge amount of investment opportunities.  Thus, as long as the interest rate is well above the current bank savings rate or Unit Trust, and within their risk appetite, they go for it.  And, as you've stated, some fund managers would always grab the local government bonds to fill their portfolio balancing needs.

Wonder if overseas investments gave positive real returns when converted to Caribbean currencies over the last two decades (even with the recent slump).  With each passing decade, it's becoming easier to invest overseas from the comfort of one's home, but since most people would invest predominantly in what they know, I suppose individual investors would find it safer to invest locally, or invest overseas only through local front-ends like UTC's Chaconia Fund.