Riyadh denied the Bloomberg report, saying it did not threaten to sell euro and French bonds as a way to influence the G7 into not seizing $280 billion of Russia’s frozen assets.
Why would you buy the new issue that yields like crap when the older bonds that got dumped are much cheaper?
The price of the bond and the yield are in an inverse relation. In other words, by dumping the bonds you increase their yield. Europe would be forced to pay a higher yield on new issues
I mentioned premium/discount in my comment. When you sell a bond on the secondary market, the price goes up or down to match prevailing interest rates. It should have no effect on new issue prices.
I am simplifying quite a bit here, but the gist is sufficient unless European bonds work differently which was my original question.
The price moves with supply and demand on the secondary market. Normally, yes, that’ll tend to vary to balance yield with the prevailing interest rates, however, the threat seems to be to dump bonds onto the secondary market, presumably without a minimum price. The glut would mean buyers could purchase them below that balance price, giving them a better yield. This would have (at least) two knock on effects, firstly it would make it harder for governments yo raise funds through bond issues as they’d effectively be competing with the cheaper ‘dumped’ bonds and so would need to offer an equivalently high yield, and secondly may allow ‘undesirable’ governments or groups to amass significant amounts of European debt, which potentially gives them more political leverage than European governments might like.
A sensible response. Thank you. I couldn’t wrap my head around how this would affect the market, but yeah if the volume is big enough and the price is low enough it could muck things up.
It’s not clear how much European debt Saudi Arabia holds, but its central bank’s net foreign currency reserves stand at $445bn. Saudi Arabia holds $135.9bn in US treasuries, placing it 17th among investors in the US bonds.
Best info on their holdings I could pull from fake news coverage. I am going to assume they hold less EU than US. So lets say 130billion.
European sovereign bond issuance continues above pre-pandemic levels: in 2021, European sovereign bond issuance, including issuance from EU Member States, the UK and the European Commission, accumulated EUR 3362.3 bn in proceeds,
Note that’s with a 3.3T
I am not a bond trader so I am not sure how big of impact Saudi sell off would cause but for them to drive the price, they would be taking big losses on top of what is likely an underwater position.
They may well be looking at how much the EU holds in Saudi assets, seeing those at potential risk of being seized and deciding tge write-down on dumping the bonds would be worth it. Long term, I don’t think it would have an effect on prices, but short term it may well do, depending on how concentrated their holdings are.
From what I can see, normal trading volume in bonds is about 500% per year, or about 2% per day assuming 250 trading days per year. If the 130bn you mention is spread across all government bonds across the EU then it accounts for about 4% of the total, or about two days of normal trade. Dump all of that in one go and it’d definitely have a short term effect. If their holdings are more concentrated they could have an even bigger effect on the bonds they hold.
Bonds tend to be issued on a regular basis, so even a short term drop in price could be timed to affect an auction. That has the twin effect of reducing the amount the government in question raises, and also tying them into effectively higher interest rates, potentially for decades to come.
I’m no expert trader either, so I could be barking up the wrong tree, but I assume that they would have a clear expectation of the results before making that threat, and I can’t really see any other effects it could be expected to have.
That is my understanding, short of KSA flooding secondary market to where nobody shows up at the auction but I doubt they got enough bonds to do this or that they would sell them in such manner anyway.
Why would you buy the new issue that yields like crap when the older bonds that got dumped are much cheaper?
The price of the bond and the yield are in an inverse relation. In other words, by dumping the bonds you increase their yield. Europe would be forced to pay a higher yield on new issues
I mentioned premium/discount in my comment. When you sell a bond on the secondary market, the price goes up or down to match prevailing interest rates. It should have no effect on new issue prices.
I am simplifying quite a bit here, but the gist is sufficient unless European bonds work differently which was my original question.
The price moves with supply and demand on the secondary market. Normally, yes, that’ll tend to vary to balance yield with the prevailing interest rates, however, the threat seems to be to dump bonds onto the secondary market, presumably without a minimum price. The glut would mean buyers could purchase them below that balance price, giving them a better yield. This would have (at least) two knock on effects, firstly it would make it harder for governments yo raise funds through bond issues as they’d effectively be competing with the cheaper ‘dumped’ bonds and so would need to offer an equivalently high yield, and secondly may allow ‘undesirable’ governments or groups to amass significant amounts of European debt, which potentially gives them more political leverage than European governments might like.
A sensible response. Thank you. I couldn’t wrap my head around how this would affect the market, but yeah if the volume is big enough and the price is low enough it could muck things up.
Best info on their holdings I could pull from fake news coverage. I am going to assume they hold less EU than US. So lets say 130billion.
Note that’s with a 3.3T
I am not a bond trader so I am not sure how big of impact Saudi sell off would cause but for them to drive the price, they would be taking big losses on top of what is likely an underwater position.
They may well be looking at how much the EU holds in Saudi assets, seeing those at potential risk of being seized and deciding tge write-down on dumping the bonds would be worth it. Long term, I don’t think it would have an effect on prices, but short term it may well do, depending on how concentrated their holdings are.
From what I can see, normal trading volume in bonds is about 500% per year, or about 2% per day assuming 250 trading days per year. If the 130bn you mention is spread across all government bonds across the EU then it accounts for about 4% of the total, or about two days of normal trade. Dump all of that in one go and it’d definitely have a short term effect. If their holdings are more concentrated they could have an even bigger effect on the bonds they hold.
Bonds tend to be issued on a regular basis, so even a short term drop in price could be timed to affect an auction. That has the twin effect of reducing the amount the government in question raises, and also tying them into effectively higher interest rates, potentially for decades to come.
I’m no expert trader either, so I could be barking up the wrong tree, but I assume that they would have a clear expectation of the results before making that threat, and I can’t really see any other effects it could be expected to have.
The prevailing interest rates is what is affected when a large holder dumps their bonds, it increases the market interest rates
That is my understanding, short of KSA flooding secondary market to where nobody shows up at the auction but I doubt they got enough bonds to do this or that they would sell them in such manner anyway.