THE MARKET for Irish government bonds stabilised yesterday on the eve of today’s scheduled auction of €1-€1.5 billion of fresh public debt. However, yields remain elevated.
The National Treasury Management Agency (NTMA) will almost certainly be obliged to offer a relatively high rate of interest this morning to entice uptake of the bonds at the auction. This is what happened last Thursday when the agency sold €1 billion of short-term debt, but paid an unusually high price to do so. These developments will push up the cost of servicing the national debt.
The yield on Irish 10-year bonds widened very slightly, to 5.3 per cent, yesterday after much larger increases last week.
The cost of insuring Irish Government debt also increased, surpassing that of Portugal, amid concerns over Ireland’s “biggest-in-Europe” budget deficit and the very high costs of bailing out the banking sector.
Last week, nervousness in the international market for government debt resulted in investors selling off the bonds of weaker euro-zone countries and buying those of the more fiscally solid countries. After Greek government IOUs, Irish bonds were most adversely affected.
The revelation that the cost of preventing the collapse of Anglo Irish Bank would be higher than previously envisaged was widely attributed as the cause of Ireland’s worse-than-average performance.
However, analysts suggest that poor sentiment may now be over-done, with spreads set to tighten once today’s auction is completed.
Yesterday, the yield on German 10-year bunds, Europe’s benchmark security, fell by as much as seven basis points to 2.3 per cent, ahead of its €6 billion bond auction later this week, pushing the differential between bunds and Irish government bonds to 299 basis points at the close of trade.
Moreover, the spread on Ireland’s five-year sovereign credit default swaps (CDS), which insure against default, advanced to 300 basis points, putting Ireland as the second-highest in the euro zone behind Greece.
However, despite the market jitters, today’s auction is expected to run smoothly. With such a premium on offer, Ciaran O’Hagan, a fixed income strategist with Société Générale in Paris, said the auction would “attract buyers out of the woodwork”.
Mr O’Hagan expects a “technical bounce” post-auction, which should see yields fall back. While he is “optimistic” on the longer-term prospects for Irish government debt, it is dependent on the Government taking action to reduce Ireland’s deficit by substantially raising taxes and charges and reducing spending in the next budget.
And, while the widening of Irish bond spreads over the past week may be due to concerns over the sovereign’s fiscal stability, there are other factors at play, such as low liquidity levels in what are summer trading conditions, and typical behaviour ahead of an auction.
“The price has to cheapen to get buyers in,” said Mr O’Hagan, “it’s normally what you’d expect ahead of an auction”.
While the NTMA has said that it retains the flexibility to postpone any of its regular monthly bond auctions, it believes that setting out its stall regularly and as planned gives it the best chance of retaining its purchaser base, thereby allowing it to continue to raise funds to finance the Government’s very large budget deficit.
Moody’s Investor Services also gave a cautiously upbeat view yesterday, suggesting that “the worst days for Ireland and its banks are (probably) past”, although it added that “fresh volatility, if sustained, would be credit-negative”.
Donal O’Mahony, chief global strategist with Davy Stockbrokers, is also positive on prospects going forward, and said that, while the renewal of the banking sector is imposing a “heavy price on Irelands fiscal position”, on a cash flow basis the impact is perhaps less than expected.
This is because borrowing costs are spread out over a longer-time period as Anglo Irish Bank’s capital injections are in the form of promissory notes, which will be borrowed and paid for over the next 10-15 years, thereby limiting the impact on sovereign debt issuance to about € 2.5 billion a year. As such, he said that the fiscal burden of the recapitalisation of the banking sector is “less than feared”.– (Additional reporting: Reuters, Bloomberg)
