Bond yields fall as Budget announced


IRISH BENCHMARK bonds strengthened yesterday and the premium demanded by investors to hold Irish bonds instead of their German counterparts fell to their lowest level in a month, as the market awaited details of Ireland’s Budget.

The 10-year Irish bond yield fell 16 basis points to 8.22 per cent yesterday evening and the spread between Irish and German bonds narrowed to 5.078 percentage points, as the markets responded positively to the details of the austerity plan, which was revealed towards close of business.

However, analysts noted that bond-buying by the European Central Bank was most likely behind much of the movement yesterday, with the ECB continuing its purchase of Irish and Portuguese bonds in particular, despite its insistence that it would not significantly increase its purchase of euro zone sovereign debt.

Elsewhere on the bond markets, uncertainty prevailed, as euro zone finance ministers meeting in Brussels said they would take no major steps to tackle the euro zone debt crisis. This was despite pressure from the International Monetary Fund.

IMF head Dominique Strauss-Kahn yesterday criticised Europe’s response to the crisis.

“The euro zone has to provide a comprehensive solution to this problem,” he said, following a meeting with Greek prime minister George Papandreou. “The piecemeal approach, one country after another, is not a good one.”

The premium that investors demanded to hold the bonds of Portugal and Spain rose yesterday morning as the failure of European finance ministers to announce any new measures overnight disappointed markets.

However, yields fell back during afternoon trading ahead of the Budget and the announcement that the commission would commence a new round of stress tests on European banks.

Despite reaching agreement to conduct a new set of stress tests, the prevailing view among market commentators was that the euro group talks were inconclusive. According to Barclays Capital, the failure to commit to further measures did not necessarily mean that the decision was “the last word”.

“It might well be that the euro group does not want to make a public decision before next week’s council of European heads of states,” the London-based bank said.