Barroso backs Ireland as bond yields hit 9.2pc
Market carefully assessing situation on a daily basis
HOPES that yesterday might finally see some calm returning to the bond market have been scuppered by a panicked sell-off of bonds in London.
This pushed the yield on Irish 10-year government bonds to over 9pc at one stage.
The latest rise in the cost of Irish government debt comes on heightened fears across Europe that Ireland is slipping inexorably towards a bailout. A poll by Reuters of bond strategists and economists showed a majority now believe Ireland will seek outside help within two years.
The yield on the bonds was 8.9pc by the end of the day. The spread over German 10-year bonds, the premium that investors are demanding to lend to Ireland rather than Germany, rose to 6.5pc.
Credit analyst Gareth Nolan of Markit said there was no "new news" behind yesterday's sell-off, but he said comments from EU officials had spooked a jittery market.
At the G20 summit in South Korea, EU Commission President Jose Manuel Barroso told reporters: "The EU is ready to support Ireland."
His spokesman in Brussels, Olivier Bailly, said officials were "carefully assessing the situation on a daily basis".
"It's sell first ask questions later when it comes to Irish risk and rumours," said one credit strategist, summing up the mood.
Comments from French Finance Minister Christine Lagarde backing "burden sharing" for bondholders if an EU member has to be bailed out added to the sentiment against Ireland and other weaker economies.
Despite the surge in the borrowing costs, Central Bank governor Patrick Honohan said he was convinced Ireland would be able to return to bond markets in 2011 after austerity measures restore investor confidence.
One trader questioned that belief, saying bond yields were now 2pc higher than they had been in October when Ireland was forced to postpone debt auctions for the rest of the year.
There were rumours among traders and analysts that the ECB was in the market buying Portuguese bonds over the past two days. Irish yields have continued to rise in the past two weeks despite limited ECB support, suggesting it will have little or no effect.
Though weak, one bright spot yesterday was some normalisation of the difference between the yield on longer and shorter-dated bonds.
Shorter-dated bonds should have much lower yields than six-year or 10-year bonds, because the risk of default should be higher over the longer period. The difference is known as the yield curve.
That curve had threatened to flatten or even invert in recent days, according to Ryan McGrath, a bond trader at Dolmen Securities.
"If the yield curve inverts that would be the final nail in the coffin," Mr McGrath warned.
The yield on two-year bonds finished at 6.6pc at the end of the day yesterday.