Sunday 4 December 2016

Irish Government bonds in dramatic one-day U-turn

bond markets

Published 13/10/2011 | 05:00

IRISH government bonds recovered in the markets yesterday, undoing the impact of a shock fall on Tuesday.

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It comes as NCB Stockbrokers said Irish bank bonds are undervalued by the markets.

The yield on 10-year Irish government bonds ended yesterday's session at 7.858pc, after spiking to 8.5pc on Tuesday.

The 'bond yield' is the income investors get for holding Irish bonds and is treated as the likely borrowing cost if the Government tried to borrow in the markets.

Yesterday, Irish bonds were the best performers of any euro area government, a dramatic turnaround in just one day.

"Volumes were low on both days but it looks like there is real money waiting when prices get to the lower levels," said bond trader Ryan McGrath.

Yields on 10-year Irish bonds ended at 7.858pc yesterday. The yield on two-year bonds was below 7pc.

The same yields were as high as 14pc in July. That was before a dramatic recovery brought borrowing costs below 8pc for the first time since the bailout.

Current levels put Ireland within shouting distance of returning to the markets to borrow, and out of the grip of the EU/IMF.

On Tuesday, that trend threatened to go into reverse, but the pattern of trading yesterday showed buyers willing to come back into the market as soon as prices dipped.

The more positive attitude for Irish government bonds has not carried through to government-guaranteed bonds issued by the Irish banks.

NCB Stockbrokers said markets are mispricing the bank bonds by not tracking the yield on sovereign -- government- issued -- bonds.

It says the bonds should not trade at a discount to other government bonds, because they benefit from exactly the same level of guarantee.

In its note to investors, NCB said the bank guarantee will only be dishonoured if Ireland is forced into a widespread sovereign-debt restructuring, which it does not expect to see.

Traders last night said the yield on the banks' bonds is up to 50pc higher than on similar government bonds. They said its partly because the ECB has supported the sovereign debt market but not bank bonds.

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