Bond yields drop on bailout talks
Published 18/11/2010 | 05:00
BOND yields threatened to head back towards recent highs yesterday but were brought down sharply after bailout talks were finally officially confirmed.
After a rocky start the yield on government bonds fell sharply from midday, even though most market sources no longer expect a deal to be announced this week.
The yield on 10-year bonds had pushed up rapidly from 8.23pc to 8.36pc in early trading. That came after LCH Clearnet said its users must provide cash deposits of 30pc of the value of any Irish government bonds traded on its system.
Bondholders use the LCH Clearnet system for so called "repo trades" -- swapping bonds for short term cash.
Last week Irish yields hit a record 9pc after LCH Clearnet introduced a 15pc cash margin.
Worries the 30pc margin would have the same impact proved unfounded. Yields did rise but fell when Minister Brian Lenihan finally confirmed that discussions with EU and IMF officials will begin today.
That led to a very sharp fall in yields to 8.11pc by early afternoon and stayed at the lower level till the close.
Traders said the bond market is now fairly anaemic. They said there are no "market makers" taking bold bets on Irish sovereign yields either rising or falling.
Subordinated bank bonds are being heavily discounted on fears of haircuts under a new bank rescue deal. AIB subordinated bonds are trading at a little over 50pc of face value.
Concerns of contagion haven't gone away. The ECB was rumoured to be buying bonds yesterday.
The reports came after Portugal paid a yield of 4.8pc for one-year bonds in an auction yesterday, compared with the 3.26pc it paid for similar paper on November 3.
The yields on publicly traded Greek bonds have remained at 11pc/12pc levels since the country was rescued in May.
Meanwhile, Greece is issuing new debt at 5pc by tapping the EU bailout funds, but is shut out of the normal market.
The yield on privately placed debt remains high in part because ratings agencies downgraded Greece to "junk" or high risk status after its bailout. Many bondholders cannot hold "junk" rated bonds.
Yields are also high because of concerns that after its three year 'bailout Greece could still end up defaulting because there is no clear path to actually reducing debt under the current scheme.