Irish bonds volatile on debt fears

Irish short-term bond yields were volatile today amid concern the euro area will struggle to resolve its debt crisis, but Central Bank governor Patrick Honohan remained positive bond markets will improve.

Bond yields have climbed in recent weeks as speculation continues that Greece may be forced to default on its debts.

Two-year yields remained above 12 per cent today, climbing to 12.422 per cent earlier before falling back to 12.228 per cent at 3.57pm, slightly lower than their opening level. Yields on three-year bonds initially climbed to 13.766 per cent before falling back to 13.444 per cent, 0.043 per cent lower than the open today.

The benchmark 10-year bond was down slightly, dropping to 11.069 per cent by 3.57pm.

Meanwhile, the German 10-year government bond yields were within two basis points of the lowest in four months.

The difference in yield between Irish and German 10-year bonds has widened 162 basis points, or 1.62 percentage point, since November 26th, before the European Union and the International Monetary Fund signed off on Ireland's rescue. The so-called spread stood at 808 basis points today.

"Market conditions now are worse than they were then, but market conditions will improve," Mr Honohan told reporters in Dublin today, as "necessary" action is taken to restore confidence.

The Government "'will go back into the markets just as soon as it judges that's the right thing to do".

Government representatives have moved to play down remarks made by Minister for Transport Leo Varadkar, who suggested it was unlikely the State would return to the international markets next year.

The Government insisted it intends to return to the bond markets in 2012 and a spokesman said Mr Varadkar had been speaking about a “hypothetical” situation in response to a query about available funding for transport projects.

The European Union may withhold the next tranche of credit to Greece after a report by an international panel of inspectors concluded that the debt-laden country has missed the fiscal targets agreed in its rescue plan, Der Spiegel reported yesterday.

Mr Honohan said there had been a "spillover" effect on the markets for Irish debt from discussions on Greece.

Ireland has "contingency plans for everything," Mr Honohan said. He said today "nothing will work" unless the Irish economy returns to growth. While growth is "very modest at best" this year, the economy will "improve" in 2012, he said.

"There is huge uncertainty regarding Greece and whether the EU and the International Monetary Fund will disburse the money and whether Greece will achieve its fiscal targets," said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan. "This is pushing investors toward the safest possible choice, which is to buy bunds."

The 10-year bund yield was less than one basis point higher at 2.99 per cent as of 12.52pm in London. It reached 2.97 per cent on May 27th, the lowest level since January 12th. The 3.25 per cent security due in July 2021 fell 0.050, or 50 euro cents per €1,000 face amount, to 102.215. Yields on two-year notes were three basis points higher at 1.59 per cent.

Earlier, they dropped to 1.56 per cent, the least since March 18th.

Greek 10-year note yields were eight basis points higher at 16.50 per cent, while the nation's two-year note yields climbed 27 basis points to 25.61 per cent. Italy's 10-year bonds fell, pushing the yield up five basis points to 4.80 per cent

Greek prime minister George Papandreou has announced a fifth round of deficit cuts to meet EU demands and prevent the region's first default.

Additional reporting: Bloomberg