The Wacky World of Sovereign Bonds

Updated September 20, 2017

Remember back in September 2011 when Standard & Poors lowered the debt rating of Italy from A+ to A and again in December 2014 when it cut the rating further to BBB-, one notch above junk bonds after it looked like the high level of Italy's sovereign debt was becoming chronically  problematic?  While it may seem like a lifetime ago, the PIIGS debt crisis began only only seven and a half years ago and it seems that the bond market is doomed to repeat its mistakes of the past, only in a much more painful way for investors.

According to National Debt Clocks, here's what Italy's national debt looks like now (in USD):

Here is a graphic showing how Italy's sovereign debt has grown as a percentage of its GDP:

Since 2011 at the height of the Eurozone debt crisis, Italy's debt situation has worsened from 117.9 percent of GDP to 157.3 percent of GDP in 2015.

  

Over the past twenty years, Italy's general government spending as a percentage of GDP has varied from a low of 45.5 percent in 2000 to its most recent level of 50.31 percent in 2015.  Unfortunately, on the revenue side of the equation, general government revenue has varied from a low of 42.97 percent of GDP in 2005 to its 2015 level of 47.76 percent.  This has led to deficits which vary from a low of 1.32 percent in 2000 to its 2015 level of 2.44 percent.  Despite the wakeup call of 2010 - 2011,  Italy's federal deficits have ranged from 3.71 percent of GDP in 2011, 2.93 percent in 2012, 2.92 percent in 2013, 3.02 percent in 2014, 2.69 percent in 2015 and 2.44 percent in 2016.  This suggests that Italy has made very little progress in fixing its own fiscal problems.

To put Italy's sovereign debt issues into context, here is a graphic showing how the level of Italy's sovereign debt-to-GDP compares to other developed and less developed nations:

As you can see, at 157.3 percent, Italy's sovereign debt-to-GDP ratio is the third worst in the world after Japan (a nation with an ongoing and unique demographic problem) and Greece (a nation that is perpetually on the wrong side of fiscal prudence).

Now, let's look at how the bond markets have reacted to this ongoing and burgeoning Italian debt crisis.  Here is what has happened to the yields on Italy's two year bonds over the past ten years:

In case you think that there is something wrong with your vision, let's look at a closeup of the yields over the past year:

That's right, for the great honour of lending Italy, one of the world's most indebted economies, your hard-earned dollars for two years, you will actually lose money since the current yield on the two year Italian bond is negative 0.135 percent, down from 0.062 percent just three weeks earlier.  And just when you thought that negative yields were a thing of the past!  The current yield on two year Italian bonds is down from a peak of 7.9 percent back in November 2011 when it looked like Italy had the potential to follow in the footsteps of its PIIGS peers and have to renegotiate its debt, providing its debt holders with that painful "haircut" that no bond investor likes to face.

So, since 2011 when Italy's debt was "only" 117.9 percent of its economy and yields on its two year bonds were just south of 8 percent, the situation has worsened to the point where Italy's sovereign debt is now nearly 160 percent of its economy and yet, thanks to central banks flooding the economy with "cash" and lowering interest rates to all-time lows, investors in Italian two year bonds will lose 0.064 percent of their investment if they hold the bonds to maturity, meaning that they actually get to pay for the privilege of holding one of the higher risk sovereign bonds in the world.

And yet, central bankers would have us believe that all is well in the global economy while this data would strongly suggest otherwise.  Investors pay heed.

Creating a New Category of Enemy for America

Updated May 2018

The Select Committee on Intelligence of the Senate recently passed S. 1761, the bill authorizing appropriations for fiscal 2018 for intelligence and intelligence-related activities of the United States government, the Community Management Account and the Central Intelligence Agency Retirement and Disability System.  While the passing of this bill received relatively little attention from the mainstream media, some of the so-called "fake news" outlets did pick up on one very salient point as you will see in this posting.

After reading through the mind-numbing legalese, right at the very bottom of bill we find the following rather innocuous section:

"SEC. 623. SENSE OF CONGRESS ON WIKILEAKS.      

It is the sense of Congress that WikiLeaks and the senior leadership of WikiLeaks resemble a non-state hostile intelligence  service often abetted by state actors and should be treated as such a  service by the United States"

The bill, which was sponsored by Richard Burr (R - North Carolina), the Chairman of the Senate Select Committee on Intelligence, was introduced on August 18, 2017 and, according to Skopos Labs, has a 34 percent chance of being enacted, rather high odds when compared to much of the other business that passes through Congress.  In case you were wondering, the Senate Select Committee on Intelligence consists of the following members:

Of the 14 members of the bipartisan Committee, only one voted against passage of the Intelligence Authorization Act for Fiscal Year 2018.  Here is Senator Ron Wyden's (D-OR) explanation for his brave standalone vote:

"My concern is that the use of the novel phrase ‘non-state hostile intelligence service’ may have legal, constitutional, and policy implications, particularly should it be applied to journalists inquiring about secrets.  The language in the bill suggesting that the U.S. government has some unstated course of action against ‘non-state hostile intelligence services’ is equally troubling.  The damage done by WikiLeaks to the United States is clear.  But with any new challenge to our country, Congress ought not react in a manner that could have negative consequences, unforeseen or not, for our constitutional principles.  The introduction of vague, undefined new categories of enemies constitutes such an ill-considered reaction.” (my bold)

Now, let’s take a closer look at the phrase "Sense of Congress", a phrase that is not often heard in public.  According to a 2016 analysis by Christopher M. Davis, "Sense of" resolutions and provisions are defined as follows:

"One or both houses of Congress may formally express opinions about subjects of current national interest through freestanding simple or concurrent resolutions (called generically “sense of the House,” “sense of the Senate,” or “sense of the Congress” resolutions). These opinions expressing the views of one or both chambers may be included in other legislation upon introduction or subsequently added by amendment."

"Sense of" resolutions and provisions have content as follows:

""Sense of” resolutions and amendments expressing the sense of one or both houses of Congress have been offered on many subjects. An informal survey of “sense of” resolutions and amendments adopted during recent Congresses shows that many of them focused on foreign policy matters, particularly resolutions that express the sense of the Senate.  However, “sense of” proposals were forwarded on a wide range of other subjects, including stressing a particular domestic policy priority; recognizing a historic milestone, figure, or location; and calling for certain federal agencies or officials to take, or refrain from taking, a specified action.”

Although “sense of” proposals have no force in law, foreign governments pay close attention to them as evidence of shifts in U.S. foreign policy priorities. On domestic issues, agencies also monitor “sense of” provisions because they may serve as an early signal that Congress will alter statutory provisions if the informal nature of “sense of” provisions does not influence agency policy." (my bold)

In a handful of words, "Sense of Congress" proposals are not legally binding, however, these resolutions are used by Congress to get a president to take a specific action or to get a foreign government to alter its policies.  In this particular case, the Senate is using this "Sense of Congress" to force the president and Congress to declare WikiLeaks a hostile intelligence service that is aided by state actors (i.e. Russia, China, Iran and whomever else is in the U.S. crosshairs at any given moment) and treat it as all hostile intelligence services are treated by Washington.

Basically, with this recent move by the Senate, the United States is taking the first steps toward declaring WikiLeaks as a new, undefined type of enemy of America, an enemy that is an arm of unnamed state actors, most particularly, Russia.  By declaring the organization as a hostile intelligence agency, the United States could eventually take more aggressive moves against the leadership of WikiLeaks, anyone who shares information with WikiLeaks and, at some point in time, prosecute those who report on WikiLeaks "leaks", a possibility that may explain the U.S. mainstream media's reluctance to publish any information on WikiLeaks ongoing revelations about the CIA's snooping activities which you can find here.  What is most nefarious about this development is the fact that, unlike the United States government and the American media, WikiLeaks has a 100 percent accuracy record in the years that it has been publishing information, information that often exposes the soft, white and very toxic underbelly of Washington.

Where is Iran's Navy Headed?

With Iran feeling the brunt of yet another round of sanctions signed by U.S. President Donald Trump, Iran's response is rather unique given its responses to past sanctions.

According to Fars News Agency,  Iranian Navy Commander Rear Admiral Habibollah Sayyari declared a new strategy to protest against what Iran perceives as a program of illegal sanctioning.  Here is a quote from the article:

"TEHRAN (FNA)- Iranian Navy Commander Rear Admiral Habibollah Sayyari declared plans to dispatch a flotilla of warships to the waters West of the Atlantic Ocean in the near future.

"No military official in the world thought that we can go round Africa to the Atlantic Ocean through the Suez Canal but we did it as we had declared that we would go to the Atlantic and its Western waters," Rear Admiral Sayyari said, addressing a ceremony in Tehran on Sunday.

He said US officials appeared on the CNN and used the world map to show how far is the trajectory of such a mission and explain in military terms that it would be impossible for Iran to traverse through waters from its Southern port city of Bandar Abbas to the Atlantic. "But we moved into the Atlantic and will go to its Western waters in the near future".

"Then it would be us to show the trajectory of our sail on the map to prove to them that we have managed to do so and that we, no doubt, will do whatever we say and are afraid of now power," Rear Admiral Sayyari said in sarcastic remarks.

In relevant remarks in April, Rear Admiral Sayyari announced the country's plans to expand naval presence in international waters, and underlined the Iranian warships' redeployment in the Atlantic Ocean.

"Redeployment in the Atlantic Ocean, intelligence superiority, development of communications, progress in the development of Makran coasts and building new vessels are among the Navy's plans in the current (Iranian) year (started on March 21)," he said.

He also referred to the Iranian Navy's powerful presence in the high seas, and said, "3,900 ships have been escorted by the Navy's fleets of warships sent to the free waters."

The Iranian Navy deployed a flotilla of warships in the Atlantic Ocean in November.

"For the first time, the 44th flotilla comprised of Alvand and Bushehr destroyers could sail around the African continent and enter the Atlantic Ocean," Admiral Sayyari told reporters in Tehran at the time." (my bold)

In recent years, Iran has been increasing its naval presence in international waters to protect naval routes and provide security for merchant vessels and tankers as part of the international efforts to combat piracy, particularly in the Gulf of Aden.  On February 22, 2011, Iranian warships sailed through the Suez Canal for the first time since 1979, a move that caused consternation in Israel.

Iran's first deployment to the Atlantic Ocean took place in January 2014 at which time a flotilla consisting of the Khark (aka Kharg) helicopter carrier and Sabalan destroyer.  Here is a photo of the Khark helicopter carrier:

Iran's navy has achieved significant progress in the development of its homegrown navy.  The Iranian Navy launched its first domestically produced 1420 ton destroyer, Jamaran, in February 2010 as shown in this photo:

In March 2015, Iran unveiled its state-of-the-art domestically produced destroyer, Damavand as shown in this photo:

The Damavand is now Iran's most powerful warship; it is equipped with advanced anti-aircraft, anti-surface and anti-subsurface missile systems and is equipped with advanced cruise missiles, sea-launched drones, torpedoes and 40 mm and 76 mm cannons.  It is capable of hitting a top speed of 30 knots and can track and target aerial, surface and subsurface targets simultaneously.   

According to the Iran Project, in November 2016, the Navy's 44th flotilla of warships sailed around the Cape of Good Hope, the southern most point in Africa and into the southern Atlantic Ocean.  The flotilla included a Bushehr logistical warship and Alvand destroyer/frigate.  Here is some additional information on the Alvand class:

At the time of the deployment and as it has in the past, the Iranian Navy made it clear that their presence in international waters was aimed at extending a message of peace and friendship at the same time as they were demonstrating the expanding power of their naval forces.

While it is quite obvious that the United States still has the most powerful naval forces in the world by a relatively wide margin, it is interesting to see that Iran has made significant strides in the development of its homegrown naval equipment, sanctions be damned.  At the very least, Iran's navy could prove to be the thorn in the paw of the lion.  At the very least, it will be fascinating to watch Washington's response to the presence of Iranian naval vessels in international waters off the east coast of the United States.   

Global Retirement Index

With the global village finding its inhabitants aging and with record numbers of people over the age of 65, a recent study by Natixis Global Asset Management that examines the level of retirement security in 43 nations is particularly pertinent.  The study looks at 18 performance indicators that are key to the older demographic component of society and covers four thematic indices and their component subindices that are important for a quality life in one's sunset years:

1.) Material Wellbeing - the material means to live comfortably in retirement - includes income equality, income per capita and unemployment subindices.

2.) Finances in Retirement - access to quality financial services to help preserve savings value and maximize income - includes old-age dependency, bank non-performing loans, inflation and interest rates subindices.

3.) Health - access to quality health services - includes life expectancy, health expenditure per capita and non-insured health expenditures indices

4.) Quality of Life - a clean and safe environment - includes happiness, air quality, water and sanitation, biodiversity and habitat and environmental factors subindices.

With this data, Natixis calculates a Global Retirement Index or GRI which allows for a consistent comparison tool for measuring retirement security between jurisdictions.  With that background, let's look at the ratings for 2017.

Regionally, of the top ten performers, eight are located in Western Europe and the remaining two are located in the Asia Pacific Region.  The bottom ranking nations are the BRIC countries (Brazil, Russia, India and China); that said, Russia and Brazil perform better than Greece and China ranks ahead of both Turkey and Greece.  Here are the top ten performers with their GRI score for 2017 and a comparison to the 2016 score in brackets:

1.) Norway - 86 percent (86 percent)

2.) Switzerland - 84 percent (84 percent)

3.) Iceland - 82 percent (80 percent)

4.) Sweden - 80 percent (79 percent)

5.) New Zealand - 80 percent (80 percent)

6.) Australia - 78 percent (78 percent)

7.) Germany - 77 percent (78 percent)

8.) Denmark - 77 percent (77 percent)

9.) Netherlands - 77 percent (78 percent)

10.) Luxembourg - 76 percent (76 percent)

While most of the top ten nations have strong scores across subindices, even the strongest nations have issues with the Finances in Retirement index, largely because of high tax burdens and a high public debt-to-GDP ratio.  Germany, Sweden and Denmark all face problems with a shrinking base of younger workers which will ultimately prove to be problematic as fewer and fewer workers support an aging population (growing old-age dependency ratio).  As you can see on this graphic from the World Bank, the growth in the old-age dependency ratio is a global issue:

For instance, here are some examples of the growing old-age dependency ratio problems among the world's developed economies, comparing the ratio in 1960 to the ratio in 2016:

Australia - 14 and 23

Austria - 18 and 28

Belgium - 19 and 29

Canada - 13 and 25

Denmark - 17 and 30

France - 19 and 31

Germany - 17 and 33

Greece - 12 and 34

Japan - 9 and 45

Netherlands - 15 and 29

Norway - 18 and 25

Spain - 13 and 29

Sweden - 18 and 32

United Kingdom - 18 and 28

United States - 15 and 23

Here is a table showing the breakdown in the Global Retirement Index scores for the top 25 nations in the study:

As you can see, the United States is a rather poor finisher, coming in 17th place, a drop from 14th place in 2016, dragged down by its very low score on the material wellbeing index.  Canada comes in at 11th place, down one spot from its 10th place finish in 2016.  Let's look at a bit more detail for both nations since these are the two nations that most of my readers come from.

United States - saw declines in two of the four indices; quality of life and material well-being.  The United States highest ranking sub-index is Health which sits in 7th place overall with the only indicator to fall being life expectancy.  Despite the United States high per capita income (5th overall), its worst performing sub-index is the Material Wellbeing subindex which sits at 28th place overall, largely because of America's issue with high levels of income inequality.

Canada - saw declines in two of the four indices; quality of life and material well-being coming in at 15th and 20th place overall compared to 8th place for Finances and 9th place for Health.  Canada's highest ranking subindex is Health which sits in 10th place overall with its life expectancy indicator rising on a year-over-year basis.  While Canada's income inequality is not particularly high (21st place overall compared to 28th place for the United States), it has fallen on a year-over-year basis.  As well, there have been declines in the employment and per capita income indicators.

With the global population aging, particularly in the world's developed economies, security in retirement will become an increasingly important aspect of life.  With many of the world's most advanced nations suffering from a rising old-age dependency ratio at the same time as low interest rates have lulled them into taking on what can only be described as dangerous levels of sovereign debt, retirees over the next 20 years may find that their retirement is not as secure as that of their parents, particularly given the growing strain on the health care system and dropping returns on investments thanks to a decade of ultra-low interest rates.