AFTER 14 consecutive days of falls, Irish bond values rose yesterday as an announcement by EU leaders that plans for burden-sharing in the event of a bailout would not apply to outstanding debt brought some respite to the market.
Minister for Finance Brian Lenihan urged Ireland to “hold its nerve” as he gave a cautious welcome to the decline in bond yields.
Yields on 10-year Irish sovereign debt fell to 8.14 per cent, having hit highs of more than 9 per cent on Thursday, as EU leaders said that current lenders to the Irish Government would not face a writedown in the case of a bailout.
The statement by the finance ministers of the EU’s five largest economies – France, Germany, Italy, Spain and Britain – issued overnight from the G20 summit in Seoul, was prompted in part by concerns about the “contagion effect” of soaring Irish bond yields on other euro zone sovereign debt, particularly Italy and Spain.
Yesterday evening the spread between Irish and German bunds stood at 562.9 basis points, a drop of more than 100 basis points.
Ireland also led a decline in the cost of insuring government debt in Europe. Credit-default swaps on Ireland dropped 57.5 basis points to 537.5, with swaps on Portugal, Spain, Italy and Greece also falling.
The clarification that those holding short-term euro zone debt would not be forced to take a writedown eased the pressure on short-term Irish debt issuance, which had come under particular pressure in recent days.
The Irish two-year note yield dropped 81 basis points, or 0.81 percentage points, to 6.89 per cent.
Despite the decline in Irish and other so-called peripheral euro zone nations’ government debt, markets remained tense, with analysts responding cautiously to the fall in yields.
“It has turned the tide for now,” said Oliver Mangan, chief bond economist at AIB Capital Markets. “The real question will be whether this can be sustained next week.”
Activity in Irish bonds remained extremely low even among primary traders of Irish Government debt, with the result that a minimal level of trades prompted a disproportionate level of price and yield movement.
Some uncertainty was also generated by a Reuters report which said Ireland was in talks about tapping the European rescue fund and was very likely to receive aid.
The Department of Finance issued a statement reiterating that Ireland had made no application for emergency EU funding. “Ireland is fully funded into the middle of 2011.”
Meanwhile NCB Stockbrokers said in a report yesterday that it was “rational” for investors to buy Irish bonds as prices overstate the likelihood of default.
“On the assumption of a 70 per cent recovery rate, the Irish 10-year bond yield and 10-year credit-default swap imply that there is an 85 per cent probability of Ireland defaulting some time in the next 10 years,” Brian Devine, chief economist at NCB, wrote.
“This overstates the probability of Ireland defaulting, and we, therefore, conclude that it is rational for investors to purchase Irish bonds as opposed to risk-free bonds at the prevailing rates.”
