Irish bonds 'delivered best returns'

Irish bonds delivered the world's best returns last week as investors bet a European agreement to save banks will reduce the nation's debt burden and ease its ability to sell debt.

But the euphoria may be premature. "We are toward the end of the rally," said Harvinder Sian, a senior fixed-income strategist at Royal Bank of Scotland in London. "While getting the bank costs taken over by the rescue mechanism is a very positive factor, Irish bonds already reflect a great deal of good news. There has to be a more convincing reason to buy them, given all the uncertainties surrounding the banking discussions."

Yields on Ireland's 5 per cent security due in October 2020 fell for a fifth week last week, the longest streak of declines in five months, after European Union leaders paved the way for cash-strapped lenders to tap the region's bailout fund directly, once they establish a single banking supervisor. Ireland wants that policy to apply retrospectively to its banks after the Government injected and pledged about €64 billion to save the financial system.

Irish bonds trimmed their rally at the end of last week amid speculation policy makers may not be able to agree on the details and the timing. Officials begin sketching out details of the deal today, as finance ministers gather in Brussels.

Europe won't obtain the powers to recapitalise banks directly in time for the injection of as much as €100 billion into Spain's financial system by mid-2013, a European official told reporters in Brussels on July 6th on condition of anonymity.

Investors made a return of 6.2 per cent on Irish debt repayable in more than 10 years and a gain of 5 per cent on bonds with a maturity of between seven and 10 years from June 28th through July 5th. Those are the biggest gains among indexes tracked by Bloomberg and the European Federation of Financial Analysts Societies.

The Government is seeking a final agreement on the plans by the end of October.

Ireland hasn't sold bonds since it sought a €67.5 billion international rescue in November 2010 after investors shunned the nation's debt amid an escalating banking crisis.

Bloomberg