Downward trend continues for Irish bond yields

IRISH BOND yields continued their downwards trajectory yesterday, amid speculation that the European Central Bank bought more government debt from peripheral nations to stem market tensions.

The euro also drew support from the ECB’s bond-buying programme and posted its best three-day gain against the US dollar since May, gaining 1.1 per cent to $1.337.

The yield on Irish 10-year money declined for a fourth straight day, dropping 0.3 per cent to 8.2 per cent. The yield difference with benchmark German bunds narrowed to 534 points.

Irish 10-year bonds had their biggest weekly advance since May 14th, when the European Union and International Monetary Fund announced a rescue fund for ailing nations.

The ECB bought Portuguese debt as well as Irish bonds yesterday, according to two people with knowledge of the deals who declined to be identified because the transactions are confidential.

Portuguese government bond yields dropped 23 basis points to 6.08 per cent, after the spread with bunds narrowed to less than 3 percentage points, or 300 basis points, for the first time since August 24th.

“We’ve seen quite a sharp tightening of spreads in the past two days on increased ECB buying,” said Vincent Chaigneau, head of rate strategy at Société Générale.

ECB president Jean-Claude Trichet said on Thursday that policy makers extended stimulus measures to stem Europe’s “acute” market tensions. The central bank will maintain its bond-buying programme and continue to sterilise asset purchases, he said. The ECB will offer banks unlimited loans through the first quarter, Mr Trichet said.

The ECB may increase purchases of government bonds to ensure the sovereign debt crisis abates, according to Dirk Schumacher, an economist at Goldman Sachs in Frankfurt.

“We remain convinced that the political will among policymakers, including the ECB, to prevent any systemic event is unquestionable,” he wrote in a research report. “We could easily see the ECB stepping up its bond purchases aggressively if things do not start to normalise.”

The ECB bond purchases won’t resolve the euro area’s debt woes and investors should step up sales of high-deficit nations’ securities, Royal Bank of Scotland Group said. “We do not think the non-core problems are over just because the buying programme is stepped up,” Andrew Roberts, head of European interest-rate strategy in London, wrote in a note to investors yesterday.

“They are very much alive and this is just a temporary fix. Look for levels to add to peripheral shorts outside of Greece and Ireland – these pullbacks are still light in the big scheme of the prior widening.” Additional reporting – Bloomberg and Reuters