Pressure intensifies on bond yields as interest rate hits 8.7%


MARKETS:THE PRESSURE on Irish bond yields intensified yesterday, as the interest charged to hold Irish ten year bonds soared to more than 8.7 per cent.

Irish bond prices fell for a twelfth consecutive day, pushing the yield spread with German bunds as wide as 619 basis points, though comments by Patrick Honohan that Ireland may return to bond markets next year appeared to give some respite to international markets towards the close of the day.

The relentless increase in Irish borrowing rates come in spite of the public endorsement of the Government’s plans by EU economics commissioner Olli Rehn, ECB chief Jean-Claude Trichet and euro group chief Jean-Claude Juncker, while the European Commission’s extension of the banking guarantee for six months failed to calm nerves.

While there was no official comment from European authorities, who typically refrain from commenting on short-term market developments, considerable apprehension remained in Brussels and Frankfurt, home of the European Central Bank (ECB), where Ireland’s financial problems are under intensive scrutiny.

The short end of the Irish bond market was under particular pressure yesterday according to analysts in Dublin. The yield on Irish government two-year bonds rose from 6.4 per cent on opening to just under 7.6 per cent, while three-year Government bonds saw yields increase from just under 5.2 per cent to 6.1 per cent during the day.

The continuing rise in Irish bond yields unfolded as London-based clearing house LCH Clearnet announced it is to increase margin requirements for customers trading Irish Government bonds.

The world’s second-largest fixed-income clearing house, which clears Irish Government bonds on behalf of its investment bank clients, said it was increasing the margin required for positions of Irish government bonds by 15 per cent.

This is in addition to the margin of approximately five per cent it currently charges for most euro zone country debt.

Some reports suggested that yesterday’s sell-off in Irish bonds may have been directly linked to the LCH Clearnet announcement. Because Irish banks are a major client of LCH Clearnet, some Irish banks had to sell off their holding in bonds, and in some cases dip into cash reserves, to meet the 15 per cent increase in collateral requirements that comes into effect tomorrow.

However, some commentators suggested that the move by LCH Clearnet might in fact bolster Irish bonds –- because investors would now have to commit more of their own money, it may now prove more difficult to speculate.

There was some positive news for the Irish bonds market from US funds company Loomis Sayles. Its vice chairman Dan Fuss, who is responsible for managing $150 billion, said that the firm has been buying more Irish government debt, as it expects the nations credit quality to remain intact.

“Two years from now, you will look back on this as one of the brightest things you did,” he said. “If you have a short-term horizon, this is not for you.”

Meanwhile Portugal sold €1.242 billion of bonds at a bond auction yesterday, just below the upper end of the €750 million to € 1.25 billion target range, even as the yields on Portuguese bonds continued rose to new highs yesterday.

Commenting on the “downward spiral” of the Irish bond market, Barry Nangle, head of bonds at Davy Stockbroker said that no new buyers were emerging in the market, while those who had been holding bonds were being forced into selling, as nervousness increased.

He also pointed out that, because of the lack of buyers, marginal sellers were having a disproportionate impact on the price of bonds.