Thursday 25 May 2017

Irish bonds slip below 8pc for the first time this year

Italy and Spain auction €17bn, raising hopes bailout can be avoided

Donal O'Donovan

Donal O'Donovan

THE yield on Irish government bonds has fallen below 8pc for the first time this year.

It came as Italy and Spain sold €17bn of government bonds yesterday, lifting hopes the countries can avoid EU/IMF bailout deals.

The yield, or interest rate, on 10-year IOUs owed by the Irish Government fell to 7.88pc yesterday, according to Bloomberg data.

It means investors are prepared to pay more than 80 cent in the euro for Irish Government bonds for the first time this year.

It's only the second time bond yields have fallen below 8pc since the State was forced to seek rescue loans last November, and the first time this year.

The yield on 10-year Irish bonds peaked at almost 14pc in July but has staged a dramatic recovery since them.

Convincing the market to cut the yield demanded to hold Irish debt is crucial to ending the Government's reliance on emergency bailout loans. Ireland should be able to fund itself in the financial markets on a sustainable basis if yields drop below 5pc.

The better market for Irish debt coincided with an upbeat assessment of the economy from Dolmen Stockbrokers.

Yesterday analysts at Dolmen predicted growth in the economy this year and said economic activity would be back at 2005 levels in 2013. The reports said the national debt would peak at 117pc of GDP in 2013. Dolmen said the debt was manageable.

The main drag on a recovery was lack of consumer spending in the domestic economy, Dolmen said. Consumers were choosing to pay off debt and save instead of spend, it said.

"A lack of confidence, rather than pure indebtedness, is the major obstacle preventing Irish consumer spending in our view. A 1pc decline in savings could release €925m into the economy."

The better sentiment for Ireland was carried through to other sovereign borrowers seen to be at risk.

Yields

Italy and Spain sold €17.7bn of bonds yesterday. Both countries had to pay more to borrow but the success of the auctions helped lower debt yields after the bond sales closed.

The extra premium investors demand to hold Italian and Spanish 10-year bonds instead of German bunds narrowed after the sale. The 'spread' between German and Italian bond yields fell to 3.69pc and the extra yield on Spanish debt fell to 3.19pc.

The boost for the bond market came as the mood across Europe soared yesterday.

"What I learnt in Washington is that Europeans finally get it," Mohamed El-Erian, chief executive and co-chief investment officer at Pacific Investment Management Co, the world's biggest manager of bond funds, said in a radio interview on 'Bloomberg Surveillance' with Tom Keene and Ken Prewitt.

Spain's auction was "a very good result" and "in the near term, assuming Greece receives its disbursement, we are in for at least a short period of relatively less volatile markets," said Matteo Regesta, senior interest-rate strategist in London at BNP Paribas, referring to Greece's next bailout payment.

"The yield was a little bit up, but nevertheless the take-up was significant and the yield pick-up not massive."

Irish Independent

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