Bond yields hit record high

Tue, Sep 28, 2010, 01:00

Irish bond yields hit a new record high of nearly 6.8 per cent today and the cost of insuring against default on Government debt surged to a record as speculation continued that the cost of bailing out Anglo Irish Bank could be far higher

At 5.30pm, the yields on 10-year Irish Government bonds were at 6.726 per cent, a fall from earlier highs in day of 6.786 per cent.

The yields jumped sharply this morning as a report from Standard & Poor's on the estimated total cost of bailing out Anglo Irish Bank said the final total could be more than €35 billion.

The Irish two-year note yield surged to the highest since Bloomberg began collecting the data in 2003.

Irish bonds have fallen and yields have risen in recent weeks amid concerns about the State's sovereign debt and uncertainty over the final cost of the bank bailout. The Financial Regulator is expected to release an estimate for recapitalising State-owned Anglo as it's split into two units - a deposit bank and an asset-recovery unit.

European central banks bought Irish government debt today, according to three people with knowledge of the transactions. The purchases focused on securities with maturities of as long as five years, said one of the people, who declined to be identified because the deals are private.

However, Taoiseach Brian Cowen today the country is not close to a "tipping point".

In a note this morning, Goodbody Stockbrokers said the Government appears to remain resolute that there will be no renegotiation with Anglo Irish Bank's senior bondholders, even those that are not state-guaranteed.

This was echoed by Davy, which said all the indications are that the government remains committed to meeting Anglo's "senior debt obligations.

About €2.4 billion of subordinated Anglo debt and €4.2 billion of its senior bonds will no longer be guaranteed from the end of this week.

The Dublin stock market fell slightly this afternoon to 2677.91, led by banking stocks. Bank of Ireland fell 4.84 per cent to 55 cent, while AIB was off 6.9 per cent, down to 49.3 cent, but on lower volumes.

Meanwhile, Portuguese bonds also slid, with the spread to the German bund increasing 24 basis points to 439 basis points.

Spreads on bonds of so-called euro-area peripheral nations have widened even after the European Union and International Monetary Fund put in place a n financial backstop for the region's most indebted nations.

"It doesn't seem that the peripheral spotlight on Ireland and Portugal is going away in a hurry," Jim Reid, a strategist at Deutsche Bank AG in London, wrote in a research note. "Ireland's broader banking guarantee expires this week and we are also expecting an announcement about Anglo Irish's bailout cost."

Credit-default swaps tied to Ireland's debt jumped 30.5 basis points to 519, compared with 205 basis points on July 28th, according to data provider CMA. Contracts on Portugal rose 21.5 basis points to 455, close to the May 6th record-high closing price of 461, while Greece climbed 20 basis points to 836. Spain gained 13 to 240.5 and Italy was up 9 to 205.5, CMA prices show.

The yield on the German bund declined 2 basis points to 2.25 percent after dropping to 2.23 per cent, the lowest since September 8th.

Spain auctioned €3 billion of Treasury bills, less than the maximum sought, as its borrowing costs rose two days before a deadline for Moody's Investors Service to announce whether it will lower the nation's credit rating.

Italy auctioned €1.41 billion of 2021 inflation-linked debt at an average yield of 2.25 per cent.

Additional reporting: Bloomberg