Friday 18 August 2017

Ireland faces bond squeeze after breaking 6.5% barrier

Dan White

Dan White

THERE were times when listening to RTE's coverage of Tuesday's bond auction when I wondered if I was living in North Korea. The auction, we were assured, was a "success" with the news bulletins enthusiastically quoting unnamed "experts" as saying that the interest rate being paid by Ireland on its bonds was "ridiculous".

The reality, of course, was very, very, different. Not alone did the NTMA have to pay an arm and a leg for the €1.5bn it borrowed, it has also been effectively locked out of the market for 10-year money.

As our creditors grow increasingly nervous, will the Irish State be forced to pay ever-higher interest rates to borrow money for ever-shorter periods? This week's Irish Government bond auction was easily the most difficult encountered by the NTMA so far this year. With the yield or interest rate on the benchmark 10-year bond now having crashed through the 6.5 per cent barrier, the NTMA chose to issue eight-year bonds instead -- the NTMA didn't respond to requests for comment.

While the decision to issue eight-year bonds had been announced by the NTMA a week earlier, the fact that it has now issued eight-year rather than 10-year bonds in two of the past three monthly bond auctions must be cause for concern.

The NTMA issued 10-year bonds in five of six first monthly bond auctions of 2010. The only exception was January, when the bond auction came just a week after €5bn of 10-year bonds had been issued to a syndicate of banks. In any case, the NTMA was able to issue 15-year bonds in the January bond auction.

In July, the NTMA issued eight-year bonds before reverting to 10-year bonds in the August auction. The recent surge in Irish bond yields seems to have deterred the NTMA from issuing 10-year bonds in this month's auction and it opted for eight-year bonds instead. By borrowing for eight years rather than 10, the NTMA was able to secure a slightly lower yield -- 6.023 per cent.

However, this can't disguise the sharp rise in Irish bond yields this year, from just 4.426 per cent for the 10-year bond at last March's auction to over 6.5 per cent this week. Where will Irish bond yields be when the next auction takes place on October 19?

Sunday Independent

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