Irish bond yields drop to pre-crash levels

Slide in borrowing costs was part of EU bond rally linked to speculation about rate cut


The yield on Irish 10-year bonds fell to as low 3.48 per cent yesterday, a level not seen since the pre-crash days of 2006 and close to all time lows.

The slide in Irish borrowing costs was part of a wider European bond rally linked to speculation that the European Central Bank may step up efforts to revive the flagging euro area economy in the wake of more dismal survey data for the currency bloc.

The yield on Irish two-year notes fell by 15 basis points to 0.84 per cent yesterday, the lowest since the Bloomberg began compiling the data in 2003.

Two years ago the price charged by the market to hold Irish ten-year debt was 15 per cent while yields on two-year bonds were 22 per cent.

The National Treasury Management Agency ’s issuance of 10-year bonds last month was seen as a major test of Ireland’s ability to raise long-term funds from capital markets.

In its quarterly economic commentary, published yesterday, Goodbody Stockbrokers has echoed calls made by other analysts that the Government should apply for a precautionary aid programme as part of its bailout exit strategy.

The Dublin-based brokerage warned that while the country was on track to exit the troika programme later this year, significant vulnerabilities still existed within the economy.

It cited the banking system and the recent rejection of the public sector pay deal as examples of potential “banana skins” which could frustrate the country’s scheduled exit later this year.

Despite the deteriorating economic outlook in the euro area, Goodbody kept its GDP growth forecasts for Ireland unchanged at 1.6 per cent for 2013 and 2.6 per cent for 2014.

However, it cautioned that these forecasts assumed a “slightly improved profile” for domestic demand and a lower-than-expected level of export demand.

“Ireland has displayed great discipline in implementing the EU-IMF bailout programme in recent years,” Goodbody economist Dermot O’Leary said.

“It is critical now that we manage our exit from the bailout in an appropriately prudent manner. There are a number of both domestic and international variables which could impact a successful exit and we need to have appropriate protection to ensure a fully successful transition to a full market return.”

“In addition it is crucial that we are not complacent in relation to our fiscal agenda and in this regard Ireland should adhere to its €5.1 billion fiscal adjustment in 2014-2015,” he added.

In its commentary, Goodbody said the NTMA’s recent return to the bond markets and the level of demand for Irish bonds meant Ireland was in a “very comfortable funding position”.

Along with the restructuring of promissory notes and a reprofiling of official loans with the EU, Ireland is now odds-on to become the first country to exit an EU-IMF programme, it said.

Seperately, two leading academic economists differed yesterday on the need to adhere to the €5.1 billion budgetary adjustment package in 2014-15.

While appearing before the Oireachtas European Affairs Committee, Professor John McHale, who is the chairmand of the Irish Fiscal Advisory Council, reiterated his organisation’s view that the Goverment should stick to the targets. Dr Alan Ahearne, economic advisor to the last government and board member of the Central Bank, differed somewhat, saying that a reduction in the €5.1 package would not in his view change financial market sentiment towards Ireland, but only provided the Government adhered to its target of bringing the overall budget deficit below 3 per cent of GDP.