Irish bonds prices surge ahead of crucial auction
Unicredit says Government not likely to fall but NAMA debts a threat
Irish bond prices climbed to 6.5pc yesterday ahead of a crucial auction of €1.5bn of debt by the NTMA as concerns build over the cost of Ireland's bank rescues and rising deficit.
The cost of borrowing dropped slightly as trading closed in Dublin and London after Finance Minister Brian Lenihan and Taoiseach Brian Cowen sought to present a united political front by holding a joint press conference at Government Buildings.
Ireland and Portugal are now facing the highest borrowing costs in the eurozone, after Greece, but today the NTMA will seek to restore some confidence by auctioning up to €1.5bn of debt to investors. Four-year and eight-year money will be auctioned with results expected by mid-morning.
The auction is expected to be successful, but the pricing will be keenly watched by the bond market.
During the day, the yield on 10-year Irish bonds rose from 6.29pc to 6.5pc, while Germany, Europe's largest economy, was paying 2.47pc for money borrowed over the same time horizon.
It is understood that the NTMA is trying to widen the base of buyers for Irish bonds, but is reluctant to see too many hedge fund buyers purchasing government debt.
The NTMA has concerns that hedge funds tend not to be long-term holders of bonds and quick sales of the securities could cause further price instability.
The European Central Bank (ECB) is reported to be buying Irish bonds on the secondary market, but the bank refuses to comment on these reports.
Some traders believe the presence of the ECB should keep downward pressure on prices. The Government will be determined that yields do not go beyond 7pc.
International opinion continues to focus on Ireland and its economy -- with the latest note coming from Italian bank, Unicredit. Its analyst Gillian Edgeworth said: "The Government must make good on a number of fronts in the next few months if it is to convince markets that it can set both public finances and the banking sector on a more sustainable track."
She said that the main negative that could impact on Irish bond prices would be further deep discounts on loans by NAMA.
"Should the discounts on future NAMA transfers prove larger than the first two tranches, concerns on the total recapitalisation needs of the banking sector may grow further," she said.
As for the political aspects, Edgeworth said: "Debate on the potential for a government collapse has gathered pace but we see this as unlikely".
Meanwhile, Goldman Sachs said it expected the currently high yields of the eurozone's weaker members to stop widening.
"All the policy backstops have put a floor under the downside risks for peripheral euro-region bonds," said Michael Vaknin, a senior fixed-income strategist at Goldman Sachs.
"Spreads are near their records, but the EU and International Monetary Fund have pledged their support and opportunities are starting to emerge," he said. (Additional reporting by Bloomberg)