ECB buying lifts bond prices for EU periphery as Irish yield at 9pc
BOND buying by the European Central Bank (ECB) continued yesterday, lifting the market for government bonds. The cost of borrowing for the Spanish and Italian governments fell for a third straight day and Irish short-term borrowing costs staged a dramatic recovery.
Ten-year yields, or borrowing costs, for Italy and Spain, settled at a little over 5pc each yesterday -- well inside the 6pc level that is seen as a danger warning and the 7pc rate where borrowing is really impossible.
"If either of those countries came to the market to borrow today, they'd do fine," said Ryan McGrath, a bond trader at Dolmen Securities in Dublin.
The focus is on Italy and Spain -- but Irish bonds are seeing a remarkable recovery.
The yield -- or interest that the State would pay to borrow in the markets -- on 10-year Irish bonds has dropped below 10pc for the first time since April over the past three days. Last night, it was only slightly above 9pc. The borrowing cost needs to fall below 6pc if Ireland is to get back into the markets, but it was almost 14pc in late July.
The yield on Irish two-year bonds dropped 2.45pc yesterday, falling to less than 10pc for the first time since April. It is down by more than half since peaking at 22pc on July 18.
The fall in yields on shorter-dated bonds is a sure sign that investors think the risk of Ireland defaulting within the next two years is now fading.
Yields for 10-year bonds are usually higher than for two-year bonds because they should be higher-risk. The Irish yields are still out of step, but only just. If that trend is sustained, it will be a crucial marker on the path to normality.
The latest ECB action has generated big rises in the price paid for most eurozone bonds -- which means that it cost less for those countries to borrow.
The ECB took the controversial decision to buy their bonds on Sunday but market sources say it will have to make big, sustained purchases to prove that it is committed to maintaining price stability.
Mr McGrath said big questions remained over how long the ECB would support markets. He warned that the ECB was seen as half-hearted when it bought Irish and Portuguese bonds, so it failed to convince the markets that there was real support for the two countries.
Last night, Padhraic Garvey, the head of developed-markets debt at ING Bank in the Netherlands, said the ECB could struggle to end its commitment to the plan, even after a planned alternative is put in place.
"The ECB is acting as a stopgap until the European Financial Stability Fund (EFSF), a European rescue fund, is fully up and running in terms of secondary-market buying," he said.
"Handing over the problem to the EFSF is not a workable solution, given the current funding capacity. For this policy to work, the ECB will have to maintain its security market programme buying." (Additional reporting by Bloomberg)