Bonds strengthen on signs of fiscal assistance

MARKETS REACTION:IRISH BONDS strengthened for the second consecutive day yesterday as international markets welcomed signs that the Government was moving closer to accepting external financial help.

However, attention turned to the subordinated debt of Irish banks, which saw a strong level of sell-off, as concerns mounted that subordinated debt holders would be forced to take a writedown in the event of a financial package for the Irish banking system.

AIB’s 12.5 per cent subordinated debt, maturing in 2019, fell as low as 45 cent to the euro, before closing at 46 cent. The debt had been trading at just over 90 cent to the euro a month ago.

Similarly, Bank of Ireland saw its 10 per cent debt, due in 2020, drop in value, hitting lows of 67 cent, compared to a bid price of 114 cent in April.

The sell-off in Irish bank debt was due to worries that holders of the debt would be forced to take a “haircut”, similar to that imposed on Anglo Irish Bank bondholders, in the event of a financial bailout.

The Government is insisting that holders of Anglo subordinated debt take a writedown of 80 per cent on their investment in the nationalised bank, with similar haircuts being proposed for Irish Nationwide.

The yields on Irish 10-year government debt continued to fall yesterday amid signs that a bailout was imminent. Having dipped below 8 per cent during the day, the yield, or interest, demanded by investors to hold Irish debt closed at 8.1 per cent. This compares to yields of 9 per cent a week ago. The spread between Irish and German bonds also narrowed to 541 basis points (5.41 percentage points).

However, the bond market remained highly illiquid, with the European Central Bank (ECB) continuing to be one of the only buyers. The ECB is reported to have bought tens of million of euro of euro zone government debt on Wednesday in an effort to stabilise prices, partly as a result of the decision by London clearing house LCH Clearnet to raise the margin it charges on Irish debt for the second time in a week.

Ratings agency Fitch said it will review Ireland’s sovereign ratings in the light of any package agreed with the IMF and EU.

Meanwhile, Spain tested the market’s appetite for its debt when it sold €3.65 billion of 2020 and 2041 bonds. The yield was higher than in previous auctions, with the 30-year securities producing an average yield of 5.488 per cent versus 5.077 per cent in September; the yield on 10-year bonds had risen to 4.615 per cent from 4.144 per cent.