Bond pressure eases on Ireland, but not at Anglo
PRESSURE on Ireland in the bond market eased last night as traders reacted positively to plans to split Anglo Irish in two and the NTMA managed to successfully raise fresh funding.
The yield (or effective interest rate) on Irish 10-year dropped to 5.74pc, a fall of 15 basis points. Ireland is still facing the second highest bond yields in the eurozone after Greece, but yesterday's drop was the first sign in weeks of pressure easing. Six-year Irish government bonds were trading at an elevated level of 4.73pc.
The main pressure yesterday came on subordinated bonds in Anglo Irish with many holders of these securities fearing the bank will either not honour the obligations or will buy them out at below face value.
Comments by the bank's chief financial officer Maarten van Eden that Anglo tried in recent months to buy back some subordinated debt spooked parts of the bond market. Insurance on Anglo subordinated bonds have surged to high levels, with credit default swaps (CDSs) pricing in a high default risk on these securities.
The National Treasury Management Agency meanwhile was successful in selling off €400m of fresh debt, with demand levels very healthy for short term money. The NTMA sold €150m due on February 14, 2011 at an average yield of 1.925pc, compared with a yield of 1.978pc at an August 26 sale. The agency also sold €250m due on April 18, 2011 at an average yield of 2.19pc, down from 2.348pc.
The auction was "reasonable and better than expected", said analysts at fixed-income specialist Glas Securities "While the size is at the lower end of the amount offered, the bid to cover is good and the fall in the average yield since the last Treasury Bill auction was much better than anticipated, given the recent trading levels."
The bid to cover is a ratio that compares the number of bids received in an auction to the number of bids accepted. Investors bid 9.4 times the February 2011 bonds and 5.4 times the April 2011 debt.
Irish bonds have been under pressure since late August, when Standard & Poor's downgraded the country to AA-, citing the escalating cost of bank rescues and low economic growth. The agency put the cost of bank bailouts at €50bn in total, a figure strongly disputed by the Government.
The gap between Irish and German borrowing costs narrowed yesterday to 366.5bps, from 371 on Wednesday.