Irish bond yields remain close to 10%

UNCERTAINTY ABOUT domestic bank funding and nerves over Portugal’s progression towards a bailout weighed on Irish bonds again yesterday, with yields sticking at 10 per cent or above and liquidity thinning.

Nerves are raw in the wake of the resignation of Portugal’s prime minister José Socrates, whose departure has raised fears that the European Union is heading for its third bailout in less than two years.

Two-year Portuguese yields reached the highest level recorded since 1999, amid concern the country may not be able to repay about €9 billion in debt due in June.

A further blow came with a downgrade from ratings agency Fitch, which has cut its long-term foreign and local currency rating from A+ to A-.

The resignation is “another nail in the coffin in terms of a bailout package”, said David Schnautz, a fixed-income strategist at Commerzbank in London. “This may be another underlying burdening factor. It doesn’t seem to be the case that you can say that the possibility of default is off the table.”

The yield on Portugal’s two-year note jumped 10 basis points to 6.71 per cent by late afternoon, and reached 6.89 per cent earlier.

The 10-year yield advanced three basis points to 7.66 per cent, leaving the difference in yield investors demand to hold the securities instead of German bunds two basis points higher at 442 basis points.

It earlier reached 450 points, the most since November.

Market-watchers expect any bailout for Portugal to total between €50–€70 billion, although no assistance has officially been requested.

New figures released by the Central Bank yesterday showed that Irish-owned banks had a €246 million exposure to Portuguese sovereign debt at the end of last year.

Irish yields climbed yesterday when LCH Clearnet Ltd, Europe’s largest clearing house, said it will raise the extra deposit charged to trade Irish securities.

Two-year yields had slipped below 10 per cent as European markets closed, while 10-year yields settled at the 10 per cent level. Three-year yields stood at 10.577 per cent as the day ended.

Donal O’Mahony, global strategist with Davy, said recent trends in Irish bonds, where shorter-dated debt has been generating higher yields, suggest the market believes there is a risk of either national default or debt restructuring.

Behind this, according to Mr O’Mahony, is a combination of worries over next week’s bank stress tests and concern about restructuring measures in the reformed European Stability Mechanism, which will come into being in 2013.

He said a better than expected result from the stress tests could provide some relief. – (Additional reporting, Bloomberg)