IRISH bonds handed investors some of the best returns in Europe last year as the Government made it clear that it does not intend to inflict losses on bondholders.
Irish bonds performed twice as well as bonds generally even though bonds did far better last year than shares or commodities. Irish 10-year paper was up 12pc in the year despite huge volatility throughout 2011.
The bonds benefited from the view that the Government will continue the previous government's policies and amid optimism that Ireland has made greater strides than other bailed-out eurozone economies. A bond's total return is made up of the change in its price, plus interest payments, assuming they are reinvested.
For the first time since at least 1997, the bond market produced the highest returns of any financial asset, beating stocks, commodities and the dollar as Europe's sovereign-debt crisis threatened the global economy.
Bonds worldwide returned around 5.9pc, including reinvested interest, Bank of America Merrill Lynch indexes show. Standard & Poor's GSCI Total Return Index of commodities fell 1.2pc and the MSCI All Country World Index of shares tumbled 6.9pc with dividends.
Not all bonds performed well. The Markit iBoxx euro-denominated indices of total returns on government bonds show Greek and Italian debt with a maturity of more than 10 years did worst.
The worst performers in 2011 were Greek bonds, which have handed investors a 63pc loss as EU leaders agreed to impose losses on investors of 50pc. Some experts fear the eventual losses could be even bigger.
Italian bonds, which came under pressure in the second half of 2011, posted a total year-to-date return of minus 11pc. Italian bond prices have fallen sharply since early July, with the 10-year benchmark trading at just 86pc of face value.
Italy yields are rising as the country prepares for a series of auctions. The government expects to raise half a trillion euro from bond and bill sales this year as the economy sinks into its fourth recession.
Europe's governments need to persuade banks and investors to buy €1.1 trillion of debt to repay long- and short-term securities next year, data compiled by Bloomberg show.
It was a very different story for Germany. Total returns on longer-dated German bonds, or bunds, were 18pc as investors put their money into liquid safe-haven assets.
Non-eurozone debt also benefited from the flight to quality, with US Treasuries posting returns similar to bunds in dollar terms.
The best performers of all were UK gilts, which gave total year-to-date returns of 16pc as the Bank of England continued with its so-called quantitative easing programme and David Cameron's government continued to trim spending. That's better than German bunds when currency fluctuations are taken into account.
Amid concern the debt crisis may prompt ratings agencies to cut their grades for some of Europe's AAA rated nations, French and Austrian 10-year yields also rose to euro-era records relative to benchmark German bunds in November.
Last month, Standard & Poor's put Germany, France and 13 other euro-area nations on review for a downgrade, saying "continuing disagreements among European policy makers on how to tackle" the region's debt crisis risked damaging their financial stability.
On January 9, French President Nicolas Sarkozy is set to resume talks with German Chancellor Angela Merkel in Berlin on ending the eurozone debt crisis. (Additional reporting Bloomberg and Reuters)