DESPITE LAST week’s successful €600 million sale of Irish short-term debt, the yield spread between Irish and German 10-year bonds remained under pressure yesterday, although markets were subdued due to a bank holiday in Britain.
While the yield of Irish 10-year bonds remains below last May’s highs, at 5.7 per cent, the differential, or spread, between Irish and German bonds has continued to widen, reaching 352 basis points yesterday, the most since at least 1991.
However, analysts say the move was largely due to wider trends among the peripheral European countries, rather than an Irish-specific story. Markets were quiet across Europe leading to lower liquidity levels, and a broad widening of spreads among peripheral countries such as Spain, Italy, Portugal and Ireland.
“Typically when there isn’t a lot of liquidity, peripherals have a problem,” said Padhraic Garvey, a fixed-income strategist at ING Group in Amsterdam.
German yields also tightened yesterday, thereby exacerbating the differential. Ten-year yields fell by 6 basis points to 2.14 per cent, after comments from the Bank of Japan that “uncertainty” over the US economy is growing.
In addition, Italy brought a €10 billion-plus deal to the market, which priced at “quite cheap levels”, said Mr Garvey, adding that it was a “heavy load for the market to take down”.
Dermot O’Leary, chief economist with Goodbody Stockbrokers, said that the major concern for the market remained what the Government was going to do with Anglo Irish Bank. As for the “latest twist”, the Green Party’s declaration that the bank should be wound down, it was adding to uncertainty in the market.
“It keeps the issue in the spotlight – not until we get some kind of policy statement on the issue will there be any tightening [in spreads],” he said.
Until then, Irish Government borrowing would be “at the whim of the market”, Mr O’Leary said, adding that if yields went over the 6 per cent level, it would be “pretty significant”, given that Greece was borrowing at lower yields from the European stabilisation fund. – (Additional reporting: Bloomberg)
