Yields on Irish bonds improve as Spanish close in on 7pc
THE difference in yield between Spanish and Irish bonds widened again yesterday in a further sign that investors are now more confident about Ireland's prospects than they are about the future of the world's 12th largest economy.
Yields on benchmark Irish 2020 bonds have fallen by almost 100 basis points since last week's European Union summit and were almost 60 basis points lower than their Spanish counterparts yesterday evening.
Spain's borrowing costs rose 17.8 basis points to 6.95pc while Ireland's costs held steady at 6.23pc.
The yield, or interest rate, on Irish bonds is now very close to the yield on Italian 10-year bonds which rose 4.7 basis points to 6.03pc.
The success of the National Treasury Management Agency's sale of €500m of treasury bills in the public debt markets on Thursday provoked one rating agency to predict that NTMA might begin selling bonds again by the end of the year.
NTMA boss John Corrigan said on Thursday that he expected to return to the markets next year.
Fitch rating agency said: "Ireland has managed to build a credit positive momentum following last week's euro area summit that, if it is able to maintain, may help it make a full return to the bond markets later this year."
Despite the bullish comments, Fitch warned market confidence remained extremely fragile.
"Expectations of an Irish return to the market earlier this year were scuppered by a further intensification of the crisis."
Moody's analyst Dietmar Hornung, meanwhile, told Dow Jones Newswires that the Government must overcome challenges to meet plans to finance itself entirely through the bond market borrowing from 2014.
Mr Hornung, who rates Irish bonds as junk, said the economy was set to grow slowly because of weak demand for exports and weak demand at home as a result of the Government's austerity programme.
"Things are developing in a way anticipated by us," Mr Hornung said. "In respect of Ireland, we see a continuation of low economic activity.
"We have seen a kind of economic recovery, but domestic demand remains weak. We are sticking with our rating because so far our expectations have been met."
Spain's borrowing costs surged yesterday after the ECB failed to announce extra measures to stem the debt crisis. Investors returned to safe haven bonds such as German bunds, sending yields below zero on Germany's two-year bonds. This means it now costs money to own some German bonds.
Austrian, Dutch, Belgian and French bonds yields also fell to record lows on demand for greater returns than those on benchmark German securities.
"Market participants are reluctant to take risk in this environment," said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets in Edinburgh.
"Spanish bonds are selling off as the market was disappointed that the European Central Bank failed to follow up on progress that European leaders made at the summit last week."