Bond yields hit new record as spread tops 500 points

THE COST of Government borrowing rose for the seventh consecutive day yesterday as the European Central Bank (ECB) returned to the market to buy Irish bonds.

The yield on Irish 10-year bonds increased to 745 basis points (7.45 per cent), while the extra yield investors demand to hold the debt instead of the benchmark German bunds rose to a fresh record of 506 basis points, up 23 basis points on the day.

The cost of insuring Irish sovereign debt against default rose to an all-time high as credit default swaps on AIB’s subordinated debt signalled a 63 per cent probability of default within five years.

The higher cost of borrowing by the State reflects mounting concerns that Ireland will struggle to reduce its budget deficit.

It also coincided with a push by Germany to make bondholders pay towards any future bailout of a euro zone state.

The proposals by Chancellor Angela Merkel for a permanent debt-crisis mechanism, cited yesterday in comments by German finance minister Wolfgang Schäuble, renewed speculation on the markets that so-called peripheral EU states – Portugal and Ireland – may follow Greece in seeking a bailout. The spreads on Greek and Portuguese debt also widened yesterday.

Following its foray into the market last week, the ECB once again bought Irish Government bonds yesterday in a bid to stabilise the situation. Two traders with knowledge of the transactions, which are confidential, told Bloomberg that the ECB purchased short-dated maturities. The Frankfurt-based central bank declined to comment.

The turmoil on bond markets spilled over into the Iseq index, where banking shares were once again brought down by the uncertainty surrounding the fiscal position of Ireland. “It was a very tricky day for Ireland again,” a Dublin-based equities dealer said.

Irish Life & Permanent’s share price fell the most of the three financial stocks listed on the index, declining 7.7 per cent to €1.34.

There was also sustained pressure on AIB, which closed down 4.5 per cent on the previous day at 32 cent, while Bank of Ireland finished down 1 per cent at 49 cent.

Contracts insuring €10 million of AIB’s junior bonds cost about €3.35 million upfront and €500,000 annually, according to data provider CMA. This compares to a cost of around €400,000 a year recorded last April.

Minister for Finance Brian Lenihan said yesterday that Ireland faced “severe difficulties”.

He also reiterated that AIB would not be fully nationalised and would “honour its debt obligations”.

The spread on Irish bonds has doubled in the past three months as the Government tries to cut the deficit in the face of a bank bailout cost that could reach €59 billion. – (Additional reporting: Bloomberg)