Monday 22 January 2018

Irish bonds outperform bunds on speculation Budget will pass

Taoiseach Brian Cowen. Photo: Bloomberg News
Taoiseach Brian Cowen. Photo: Bloomberg News

Irish 10-year bonds outperformed benchmark German bunds amid speculation the Dail will approve a government austerity plan, allowing Taoiseach Brian Cowen to win an international bailout.

The yield on the bund rose to an almost seven-month high and widened its premium over the two-year note yield to the most since June as Treasuries fell and stocks advanced after US President Barack Obama agreed to extend tax cuts. Portuguese and Spanish bonds fell.

European finance ministers yesterday ruled out immediate aid for the nations or an increase in the region’s rescue fund.

“The risks are skewed to the Irish budget passing, but if there are hiccups that would be a major blow to the rescue,” said David Schnautz, a fixed-income strategist at Commerzbank in London. “A brightening up of the outlook for the US economy is giving bunds a weak start out of the blocks.”

The 10-year Irish bond yield advanced four basis points to 8.41pc as of 10:43am in London.

The 5pc security maturing in October 2020 fell 0.21, or 2.10 euros per 1,000-euro face amount, to 77.70. Credit-default swaps on Ireland declined 11 basis points to 543.9, according to CMA prices.

The bund yield climbed five basis points to 2.90pc, after rising to 2.92pc, the highest since May 14. The difference in yield, or spread, between two- and 10-year German securities rose to 206 basis points, the most since June 24.

Biggest decline

Irish bonds handed investors a 10pc loss since June, the most for government bonds tracked in indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, amid concern that saving the nation’s banks would overwhelm government revenue.

Finance Minister Brian Lenihan will lay out the 2011 budget, with €6bn worth of spending cuts today at 3:45pm.

It must pass for the Government to secure an €85bn aid package it sought from the European Union and International Monetary Fund last month.

The Stoxx Europe 600 Index climbed 1.1pc, while the yield on the 10-year US Treasury advanced eight basis points to 3pc.

Klaus Regling, who manages the €440bn part of the bailout fund financed by euro-area governments, said a first sale of €5bn of bonds to finance Ireland’s package is scheduled for the second half of January.

Germany led opposition to an increase in Europe’s crisis- aid fund or the introduction of joint bond sales as European finance ministers met in Brussels yesterday.

“Right now I see no need to expand the fund,” German Chancellor Angela Merkel told reporters in Berlin yesterday. European treaties don’t “allow euro bonds, as far as we’re concerned.”

‘Something bad or something big’

Meetings of the region’s policy makers today and next week may be a last opportunity to tackle the sovereign-debt crisis before a bond “supply frenzy” in early 2011, Royal Bank of Canada Europe said.

“If nothing has been done by then and markets have not miraculously turned around, things may turn nasty, so either something bad or something big is likely to happen,” Peter Schaffrik, head of European rates strategy in London, and Jens Larsen, chief European economist, wrote in a research report yesterday.

The yield on the Portuguese 10-year bond climbed 15 basis points to 6.24pc, with equivalent-maturity Spanish yields 10 basis point higher at 5.31pc. Italian yields advanced five basis point higher to 4.56pc, while Greece jumped 12 basis points to 11.78pc.


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