Anglo drives Irish-German premium to month high

THE PREMIUM that Ireland pays over Germany on 10-year bonds hit the highest level in a month, as investor concerns over the level of capital required by Anglo Irish Bank grew.

The yield on Irish 10-year bonds broke through the 5.4 per cent mark yesterday, while German 10-year bund yields fell to a record low.

These two factors pushed the Irish-German spread out to almost 300 basis points at one point, a level not seen since early July.

However, the spread tightened up during afternoon trade and closed just below 289 basis points.

The Irish 10-year bond spread declined from a peak of nearly 300 basis points in 2009 to about 150 basis points at the start of 2010.

However, the spread rose sharply at the end of April and hit 300 basis points due to sovereign funding uncertainties in Europe.

It had narrowed somewhat in recent weeks, but began pulling out again on Monday.

It emerged on Tuesday that the Government had won approval to raise the level of capital it can inject into Anglo Irish Bank, and this is believed to be one of the factors driving the move in Irish spreads.

“The uncertainty surrounding the exact amount of the transfer into Anglo is weighing on the Irish sovereign,” said Dublin stockbroking firm NCB.

The National Treasury Management Agency (NTMA), which manages the State’s debt, is due to hold its next auction on August 17th,

“The NTMA will be hoping that the Anglo issue is cleared up sooner rather than later, and that clarity is given on the final requirement by the State,” NCB said.

Donal O’Mahony, of Davy stockbrokers, said that if markets were efficient, the announcements relating to Anglo should have been long absorbed.

He believes that the impact of the news surrounding Irish banks has been magnified because of “quiet summer markets”.

The movement in Irish spreads is partly a function of “the relentless drive lower” in benchmark yields, including German bunds, he said.

In absolute terms, Irish bond yields are still some way below their peak of 6.1 per cent reached in March 2009.

The yield on the 10-year German bund dropped to 2.41 per cent yesterday, the lowest level since at least 1989.

This was after the US Federal Reserve decided to keep its bond holdings steady to support the weaker-than-anticipated economic recovery. – (Additional reporting, Bloomberg)