Ireland braced for vital bond auction on today
Spread over German rates rose over 3pc yesterday while default swaps surged
Ireland is facing the most important bond auction of the year so far today as the NTMA seeks to raise up to €1.5bn on behalf of the exchequer. A failed bond auction could have serious implications for the government and the economy.
The gap or 'spread' between German and Irish bonds surged to over 3pc yesterday, while even more alarmingly the cost of insuring Irish bonds hit the highest point since March 2009, when the financial crisis was at its most intense and some market players speculated that Ireland might default on its debts.
The markets are becoming increasingly spooked about the final bill for Anglo Irish Bank and many key bond purchasers are avoiding Irish bonds until the final cost of the bank rescues becomes clear.
While the governor of the Central Bank, Dr Patrick Honohan, has called Irish bond spreads "ridiculous'', some European bond buyers believe the sheer scale of Ireland's banking problems have yet to emerge.
While rising bond yields for Ireland are a concern, today's issue is relatively small and support from Irish banks and institutions is likely to be present.
However, the cost of the funding could be very high putting further pressure on Ireland for the next auction.
The auction will consist of four-year and 10-year money and results of the auction should be known around mid-morning.
The Department of Finance is believed to be monitoring the results closely.
"I'm not in a rush to buy Irish bonds," said Robin Marshall, a director at Smith & Williamson Investment Management in London told Bloomberg.
"The government has done all it can to address the problem, but that doesn't cap the rise in bond yields. It's just a reflection of the sheer size of the banking problem there."
Credit-default swaps on Irish government debt rose for a ninth day, climbing 18.5 basis points to 302.5, the highest since March 2009.
Credit default swaps are a form of bond insurance and traders pay close attention to these derivatives to see which way sentiment is moving.
The figures have deteriorated since the EU Commission revealed Anglo Irish could need as much as €24.5bn in fresh capital.
Investors have been demanding a large risk premium from the NTMA during recent auctions. Most starkly an auction on July 20 saw investors demanding a yield of 5.53pc for 10-year money.
"I don't think the market doubts the Irish Government's willingness and commitment to deal with the country's problem," said David Schnautz, a fixed-income strategist at Commerzbank in London.
"But due to the magnitude of the problem in the banking sector, which is so intertwined with the country's finances, some people are starting to wonder if it will be able to deliver positive results."
Contrary to rumours last week the European Central Bank does not appear to be buying a large amount of Irish government bonds.
Figures released yesterday showed ECB bond buying slowing down to just a trickle.
(Additional reporting by Bloomberg)