The ups and downs of our bond market
Published 24/11/2010 | 05:00
ANYBODY who wants to know what the markets think about the recent events in Ireland need only look at this graph to understand the agony and the ecstasy endured by the bond markets over the past few days.
When the graph dips and the cost of borrowing falls, we see signs of some faith in the Irish economy. When the graph of the yield on Ireland's 10-year bond starts to rise, we see signs of fresh worries.
The cost of borrowing began to tumble towards the end of last week when Central Bank Governor Patrick Honohan admitted what everybody knew: we were in talks with the European Commission, the European Central Bank and the International Monetary Fund about a large bailout worth tens of billions of euro.
While the cost of borrowing fell on this admission, there was a spike late on Thursday as the European Central Bank said it wanted to withdraw the emergency funding which is propping up the banks here sometime in January. Despite this hiccup, the cost of borrowing continued to move slowly downwards on Friday as the bailout team began work in Dublin and Finance Minister Brian Lenihan finally admitted the talks could lead to a bailout.
Amid confusing and contradictory comments from government ministers, the graph creeps upwards once again but falls on Friday when Brian Cowen says that talks are "going well".
The graph begins to slope upwards once again after Allied Irish Banks shocks the markets late on Friday by admitting that customer deposits shrank 17pc this year.
While AIB's announcement once again ignited fears about the economy, the graph fell when the markets opened on Monday following Sunday's Cabinet meeting which finally brought clarity by approving a bailout request.
Monday morning's sharp downward trajectory was reversed very quickly around 11am by two events that took everybody by surprise and made the yield soar once again. The first event was the threat of a "multi-notch downgrade" to Irish bonds by the influential rating agency Moody's which shook markets.
The second event, which followed Moody's warning, was the Green Party's announcement that it would force an election -- a decision that threw the entire bailout into question. Since then the cost of borrowing has shot higher and showed no signs of stopping last night.