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Traders expect tough budget as Irish yields head for 8pc

Positive figures but experts say levels must hit 6pc before return to debt markets

Emmet Oliver, Deputy Business Editor

Published 02/09/2011 | 05:00

German Chancellor Angela Merkel and Portuguese Prime Minister Pedro Coelho address the media after talks at the Chancellery
yesterday during Coelho's first official visit to Germany. Portugal's debt situation was high on the talks agenda
German Chancellor Angela Merkel and Portuguese Prime Minister Pedro Coelho address the media after talks at the Chancellery yesterday during Coelho's first official visit to Germany. Portugal's debt situation was high on the talks agenda

Irish bond yields are on the cusp of dipping below 8pc for the first time since the country agreed to an €85bn bailout in November.

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Economists are now calling on the Government to push through one more budget of austerity to copper-fasten recent gains.

Market traders told the Irish Independent 10-year yields, the most watched benchmark, could slip below 8pc by early next week.

However, yields would have to return to 6pc for Ireland to have any realistic chance of re-entering debt markets, they caution. Ireland's benchmark yields are at 8.4pc, although ECB bond-buying remains a pivotal factor.

Irish bonds have rallied over most of the summer, although bond traders are gradually tuning into the expenditure reductions and tax rises that will form the budget in December.

The market is separating out Greece, Portugal and Ireland. Greek 10-year yields sit at 16.9pc, while Portugal is struggling with borrowing costs on the secondary market of 10pc. Spanish yields have started to edge over 5pc.

Reflecting the immediate concerns of a eurozone breakup, two-year Irish Government bonds are yielding 7.3pc, down from a high of 23pc in mid-July

Yesterday, European banks were once again noting the recent progress made in Irish yields.

Julien Seetharamdoo, investment strategist at Coutts, told the 'Wall Street Journal' he noted the "encouraging export-driven performance of the economy," which, when coupled with higher tax revenues, helped Ireland receive a recent upbeat assessment from the IMF.

Meanwhile, NCB said yesterday it was lowering its deficit and debt-to-GDP figures as a result of the lower interest rate assumptions flowing from the July 21 EU summit deal.

Deficit

"We expect the underlying deficit-to-GDP ratio to register 9.8pc in 2011 (previously 10pc) and reach 4.2pc by 2014 (previously 4.8pc),'' said the broker.

Spain and Italy sold bonds this week at lower yields than previous auctions, suggesting record debt purchases by the European Central Bank in the secondary market have helped to contain the nations' borrowing costs. Spain auctioned five-year securities yesterday at an average yield 38 basis points below those sold at the previous auction on July 7. Investors bid for 1.76 times the amount on offer, down from 2.85 times. Italy sold 10-year debt yesterday at 5.22pc, compared with 5.77pc on July 28.

Portuguese Prime Minister Pedro Passos Coelho yesterday spoke to Germany's Angela Merkel about possible German investments in his country's energy sector and officials travelling with him met with German energy companies, a source close to the talks said.

The CEO of Germany's EON, Johannes Teyssen, was involved in the talks in Berlin, the source said. (Additional reporting by Reuters)

Irish Independent

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