INVESTORS ARE braced for renewed turmoil in euro-zone bond markets as fears about the health of Ireland and Greece pushed the borrowing costs of highly indebted nations sharply higher.
Official figures showing Greece had sunk deeper into recession in the second quarter of this year spooked investors who had returned to buy the euro and peripheral euro-zone government bonds in the belief Europe’s sovereign debt crisis was easing.
The National Treasury Management Agency (NTMA) yesterday had to pay investors nearly double the rate of interest it paid three weeks ago in a sale of treasury bills.
German benchmark interest rates fell to record lows. The premium paid over bunds to investors buying Greek, Portuguese, Irish, Italian and Spanish debt has risen sharply in the past week after the US Federal Reserve announced the first steps towards further monetary easing. “It is an interesting little warning sign this week. The problems have not gone away, the cracks have just been papered over,” said Gary Jenkins, head of fixed income at Evolution Securities.
The NTMA sold €500 million of six-month bills at an average yield of 2.458 per cent, against one of 1.367 per cent on July 22nd. It also sold €500 million of nine-month bills. Analysts fretted that Ireland, held up as a model for deep budget cuts early on, had little further room for manoeuvre. There was speculation the European Central Bank (ECB) had intervened to buy Irish bonds, which saw yields stabilise.
The spread over German benchmark bunds has widened by 51 basis points since Friday. Fresh concerns about Irish banking have put the bonds under pressure too.
“Ireland has done almost all it can and it still is vulnerable. It is quite a worrying prospect long term . . . ” said Jim Reid, bond strategist at Deutsche Bank.
Irish 10-year yields fell slightly on the rumours of ECB action and were down three base points to 5.29 per cent. But Italian, Greek and Spanish yields all rose. Ten-year German bunds reached record lows before stabilising at a yield of 2.42 per cent.
The move from riskier assets, after weak data in the US and China, has hurt peripheral euro-zone countries’ bonds and caused the optimism of last month’s bank stress tests to evaporate.
“The stress tests and better-than-expected earnings: they are all just a sideshow to the economic data,” said Mr Jenkins.
Many investors are bracing for more turmoil in the euro zone in the coming months. – (Copyright The Financial Times Limited 2010)
