Record yields to hit Ireland bond auction

STRICKEN Ireland is poised to re-enter the debt markets today but record yields on its government bonds mean it will have to pay a steep price for failing to convince investors that it can meet the escalating cost of bailing out its banks.

The extra yield premium demanded by investors to hold Irish 10-year bonds over German bunds widened to 423 basis points yesterday, the greatest since the euro was introduced in 1999.

Central bank governor Patrick Honohan warned yesterday that the Irish government would need to take even tougher fiscal action over the next few years but this did little to calm the market’s nerves.

Against this backdrop, the National Treasury Management Agency (NTMA), which manages Ireland’s debt, is set to raise €1.5bn (£1.26bn) with the issue of a four-year and eight-year bond. However, it will be forced to pay investors greater compensation for holding Irish government debt.

The auction is seen as a key test of investor sentiment towards Ireland. “After all the rumours and speculation last week I think it’s going to be quite tough for them. [We are] certainly going to see people demanding much higher yields on the auction. I think it could be tricky,” said Melanie Bowler at Moody’s Analytics.

When Ireland last issued an eight-year bond in June it achieved a yield of 5.088 per cent.
Secondary market yields, which are seen as the best guide to today’s auction, were yesterday 6.13 per cent. It sold four-year bonds at a yield of 3.11 per cent in May. These are now trading around 4.875 per cent.

The biggest concern for investors is the lack of clarity regarding the cost of recapitalising
nationalised Anglo Irish Bank and the country’s Budget deficit which is forecast to be 11.6 per cent of GDP this year, the biggest in the Eurozone.

irish debt crisis | a timeline

October 2008 Ireland officially becomes the first country in western Europe to fall into recession as the global economic downturn gathers speed.

February 2009 Unemployment rate reaches 11 per cent, the highest in over a decade. Protests take place in Dublin against Prime Minister Brian Cowen and his government’s fumbled handling of the crisis.

March 2009 Public finances quickly deteriorate amid a deep recession. The Irish Republic loses its AAA debt rating, in a massive blow for finance minister Brian Lenihan. GDP falls 8.5 per cent from previous quarter.

April 2009 Government is forced to present its second budget in six months to deal with a fiscal shortfall of over €4.5bn and a rapidly shrinking economy.

October 2009 Economy exits recession with GDP growing by 0.3 per cent, but GNP continued to contract by 1.4 per cent.

July 2010 According to the National Treasury Management Agency, Ireland successfully meets its debt servicing requirements for 2010 and into the second quarter of 2011.

September 2010 Irish officials prepare to sell up to €1.5bn of debt.