THE YIELD on the benchmark nine-year government bond dropped below 5 per cent yesterday morning for the first time in more than two years.
The nine-year yields dropped to 4.99 per cent, the lowest yield since August 2010, several months before the State was bailed out.
The rate on the 2020 bonds was 9 per cent when the Government applied for the EU-IMF programme in late November 2010.
The rally in the bond market to date this year is the second strongest in the euro region in 2012, trailing only fellow bailout recipient Portugal.
“Sentiment has changed a lot since July,” said Michael Cummins of Dublin-based Glas Securities.
“The July summit indicated Ireland would get some sort of additional relief. This combined with the ECB bond-buying plan has led to increased demand.
“Ireland is in a good position now relative to other peripheral countries in the sense that there is no immediate refinancing pressure. This lack of supply and increased demand dynamic is driving the aggressive move in Irish yields.”
While the State now borrows largely from the troika, the fact that Irish bond yields are falling raises the possibility of a full return to the bond markets and strengthens the chances of emerging from the bailout programme next year without requiring further support.
However, Michael Sanders, head of European economics at Citigroup in London, said the optimism that Ireland can raise money in the markets and avoid a debt restructuring was premature.
Ireland has taken full advantage of a dive in bond yields, in evidence since July 2011. This year it has restarted its treasury bill programme, launched a bond swap, issued its first sovereign annuity bonds and raised €4.2 billion in new long-term debt.
The flurry of activity, spurred on by euro zone leaders in June deciding to look at easing Ireland’s bank debt, has allowed Dublin to push out debt repayments over a longer time horizon.
Meanwhile, the Spanish treasury sold €4.8 billion of three- and 10-year bonds, more than the €4.5 billion it had targeted for sale. The 10-year bonds were priced to yield 5.6 per cent, well below the 6.6 per cent it received at a similar auction August 2nd.
The lower yield suggests that investors are more comfortable holding Spanish debt.
Euro zone fears have abated markedly since September 6th when Mario Draghi, president of the ECB, said the bank was prepared to buy Spanish and Italian government bonds in “unlimited” quantities if necessary.
German 10-year government bonds advanced for a fourth day yesterday, the longest run of gains this month, as demand slipped at the Spanish auction of securities due in 2015, fuelling demand for the euro area’s safest assets.
The rally pushed bund yields to the lowest in a week as a report showed euro-area services and manufacturing output fell to a 39-month low in September, adding to evidence that the region is set for a recession. – (Additional reporting: Reuters, New York Times service, Bloomberg)
