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Borrowing costs fall sharply for distressed eurozone countries

BORROWING costs for Ireland and other stressed eurozone countries fell sharply last night, as markets turned optimistic ahead of Friday's meeting of European leaders.

The yield, or interest, charged to lend to Ireland for 10 years fell from 9.08pc to 8.8pc. The yield on 10-year Greek bonds dropped from 11.2pc to 10.9pc and Portugal and Spain saw similar drops.

The cost of credit default swaps (CDS), which insure bondholders in case of a default, also fell sharply. In the biggest such move, the cost of protecting Spain's bonds against default fell more than 10pc.

Gavan Nolan, an analyst at Markit in London, said the rally was helped by strong eurozone purchasing manager index (PMI) data and especially by persistent rumours European leaders would move closer to a radical revamp of the European Financial Stabilisation Fund (EFSF) at a meeting on Friday.

Few investors expect a definitive announcement on EFSF this week but the potential for a deal saw them tiptoe back into the market, with many hoping to see an outline agreement.

Investors are betting on a deal that would allow the EFSF to buy Greek and Irish bonds. As it stands, the EFSF can only lend directly to Ireland.

According to ING Bank's Padhraic Garvey: "There is a degree of optimism that something is going to happen to push the markets."

However, most bigger investors will wait for clearer signals from Europe before wading into the market.

Although there were sizeable moves across the market yesterday, it remains fragile.

If a deal on radicalising the EFSF is announced, probably on March 24, the bond market could snap back even more quickly as less fleet-footed investors scramble not to be left on the wrong side of a rising market.

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But the relatively small amount of buying behind the latest rally means the market could fall back just as quickly.

A perennial concern is that the latest moves could convince more cautious political leaders that the markets are returning to normal and do not need further intervention, which would hurt bond investors.

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