Demand for safe assets hits Irish bonds

IRISH BONDS continued to suffer yesterday, as concern that the so-called “peripheral” nations will struggle to reduce their budget deficits spurred demand for the safest assets.

The bonds weakened for the 11th consecutive day, their longest run of declines since January 2009.

The yield on the benchmark bonds closed at 7.938 per cent (or 738 basis points), a euro era record high.

The Commerzbank, Germany’s second largest lender, warned its investors that Ireland’s economic difficulties are moving the country “into Greek territory”.

In an investor note issued yesterday, the bank blames Ireland and “other periphery countries” for the euro’s decline against the dollar.

“The most recent losses cannot be traced back to the US data, rather the euro has posted losses in nearly all other G10 currencies in recent days,” the bank noted. “A look at the peripheral countries shows why: spreads are on the move!”

Credit default swap spreads for Ireland and Greece are at an all-time high.

“At 600 basis points, Ireland finds itself in the meantime almost in Greek territory,” the bank said. “The likelihood of failure of bonds, as set by the market, lies in Ireland already at 40 per cent,” said Commerzbank economists.

Markets were nervous ahead of today’s Portuguese sovereign debt sale, the bank observed. Difficulties during that sale would, according to Commerzbank, “bring the European debt crisis once and for all into the focus of markets”.

Some market analysts warned that intervention by the European Central Bank (ECB) was not sufficient to stop the cost of Irish government borrowing from escalating further.

Purchases of government bonds issued by Ireland and Portugal are “puny” and “of little help”, Societe Generale said.

“We are heading towards putting some bond markets into a prolonged period of cold storage,” as is already the case with Greece, Ciaran O’Hagan, a fixed-income strategist in Paris, wrote in a note to investors yesterday.

“We maintain our recommendation to avoid the riskier sovereigns,” he added.

A note from bond market specialists at the Royal Bank of Scotland also suggested that the ECB’s bond-buying was “too small”.

Meanwhile, German 10-year bunds climbed for the second day.

The difference in yield, or spread, between 10-year Irish bonds and similar-maturity bunds widened to a record 552 basis points, or 5.52 percentage points, even as European economic and monetary affairs commissioner Olli Rehn said Ireland had not asked for aid.

“Concerns over sovereign debt in the euro zone periphery remained in sharp focus yesterday,” Ulster Bank economist Richard Ramsey said in a note.

“The Irish bond spread on 10-year sovereign debt reached 550bps over the last 24 hours which represents another record margin.”

Greece sold €390 million of 26-week treasury bills yesterday. Investors bid for 5.15 times the securities offered. (Additional reporting – Bloomberg)