Debt interest rate falls on back of good bond auction
THE interest rate on Irish government debt began to fall even during yesterday's auction of government bonds, as word came through of strong offers of loans to the Exchequer.
The outcome was correctly predicted by analysts at German bank WestLB, who said the Irish auction "will probably steal the show", leading to a fall in Irish yields and a rise in German ones.
In the event, a disappointing investor survey reduced the rise in German yields, with the difference between the two countries narrowing by 0.08pc and falling below the 3pc level.
After a sharp rise in rates on short-term money last week, yesterday's auction was closely watched in financial markets. Analysts were impressed by the demand for €500m of four-year loans, with €3bn being offered by banks and investment funds.
"This in itself does not necessarily signal success, but we believe the spread over Germany had gone too far," said Brian Devine, chief economist at NCB Stockbrokers.
"The one thing which could stop spreads from tightening is the Irish banking sector, in particular Anglo Irish Bank. The EU Commission decision on Anglo due in September will hopefully clarify that €25bn is the final figure for the rescue.
"Focus can then shift to the Government's proposals for Budget 2011 and an update on the plan to reduce the deficit to below 3pc of GDP by 2014," he said.
The National Treasury Management Agency (NTMA) borrowed €500m by selling four-year bonds at an average yield of 3.627pc and €1bn in 10-year money at an average 5.386pc, which was lower than the 5.537pc required last month.
"People heard about the strong demand and started buying Irish bonds on the market, even as the auction took place," said the NTMA's deputy director of funding and debt management, Anthony Linehan.
The success of the monthly auctions should also remove fears of any immediate difficulty in borrowing the amounts that Ireland requires. The NTMA has so far raised €18.3bn this year -- almost all the €20bn needed in 2010.
A continuation of the monthly auctions, plus strong inflows from small savers in An Post, would see the NTMA enter 2011 with €10bn in hand. It will need to raise €25bn next year, made up of €18bn for the budget deficit, €2.5bn for Anglo and the replacement of €4.4bn of maturing bonds.
Spain yesterday raised €5.51bn of debt, at the top end of its target, also on lower yields than last month.
"It is good for periphery sentiment -- government in general are not having funding problems which is a good sign for markets," said Orlando Green at Credit Agricole.