State's cost of borrowing doubles in euro turmoil
The Irish Government's borrowing costs have more than doubled since the last week in April to hit close to 1.5pc for 10 year debt at one stage yesterday.
Analysts have described the surge in borrowing costs for euro-area nations as a "market rout" with Ireland among the worst affected in a week-long shift in lender sentiment.
"From a fundamental perspective, nothing has changed on Ireland but the market was very one sided (in favour of low yields) and is now moving sharply the other way all at once," according to Owen Callan of Cantor Fitzgerald in Dublin.
Volatility is especially high because big global banks that traditionally smoothed out big jumps by "making markets" - using their own balance sheets to buy and sell bonds - have been sidelined in part as a result of increased regulation.
Yesterday the yield, or return, investors demand to hold Irish Government bonds moved sharply higher to 1.49pc at one stage, before settling at around 1.25pc. The levels are the highest seen so far this year.
As recently as April 28 the cost of borrowing for 10 years was less than 0.70pc. At the worst period of the euro crisis the yield was around 14pc.
The latest swing is reversing a three-year trend and a sign of a more challenging financing and volatile financing environment.
Ireland is among the worst- hit countries as bond market investors pull cash out of a market that had seen yields fall to all-time lows on the back of mass buying by the European Central Bank (ECB).
Over the past two months the ECB's quantitative easing (QE) bond purchase programme has been blamed by investors for distorting markets and eliminating premiums usually paid for risky lending.
The past week has seen a reversal of that trend as private investors dumped euro-area bond holdings, driving prices lower and yields up.
The sell-off deepened yesterday, exacerbated by upcoming debt sales of more than €12bn that will prove a strong test of investor demand.
Analysts said the week-long market capitulation, which was first sparked by easing deflation fears and investor weariness with ultra-low yields, had been exacerbated by nervousness that investors may be reluctant to swallow a large sale of French bonds and a smaller Spanish debt auction.
Yields tend to rise ahead of bond auctions as investors make room in their portfolios for the new supply. Not all analysts buy that argument. "People often use supply as a scapegoat for market moves. It is something to hang their hat on," said Rabobank's Richard McGuire.
"We continue to argue that it is not supply that drives curve shape or yield levels, it is inflation and growth expectations as we saw during the UK and US variants of QE."
Fears that Greece could finally be set to exit the euro are not behind the market weakness, according to Owen Callan.
Greek bank shares, an index of investors' assessment of the risk of a messy crisis there have recovered in recent weeks, Mr Callan noted.
The re-emergence of bond market volatility has yet to feed into the real economy, but if it lasts banks as well as states and companies will see their costs of borrowing rise, although from historic lows. (Additional reporting Reuters)