Markets still assign risk to Irish bonds despite record low yields

Irish bond yields may be at record lows, but an analysis of credit default swaps (CDS), which insure against Irish government debt default, shows that markets are still assigning a certain degree of risk to Irish bonds.

According to data from S&P Capital IQ CDS, spreads on Irish 10-year bonds stood at 104.88 on Friday, November 21st. This is a significant retrenchment on the 1,000+ level reached in July 2011, some nine months after the troika bail-out of November 2010 and a time when Irish bond yields peaked at 14 per cent. However, while CDS spreads have since shrunk back to about 100, dipping below 90 for the first time during the summer, they are still considerably higher than pre-bust,when they were sub-10, thus illustrating that the cost of insuring against an Irish government bond default remains somewhat elevated.

For Alan McQuaid, economist with Merrion Stockbrokers, the differential between bond yields and associated CDS is a function of artificial bond yields.

“Given where the economy is, the argument is that yields are too low,” he says.

Indeed Irish bond yields hit a record low of 1.48 per cent yesterday, and European bond yields are falling again today, as the risk of slowing inflation boost prospects for stimulus. Spain’s 10-year yield fell three basis points to 1.94 per cent in London this morning, while Germany’s 10-year yield declined two basis points to 0.76 per cent.

Of the potential riskiness of Irish government bonds, Mr McQuaid says that it’s “hard to see a default at this point in time, because the fundamentals have improved dramatically,” adding that the “rhetoric” from the ECB would also lend one to believe that bonds are “very, very safe”.

With QE now seen as “inevitable”, McQuaid expects that it will drive Irish bond yields down even further closer to 1 per cent.