Yield on Irish borrowings dips to new lows

As the markets waited yesterday for the latest pronouncement from ratings agency Fitch on its view of Irish sovereign debt, the yield on those borrowings was dipping to new record lows.

The yield on the Irish 10-year government bond tumbled through the 2 per cent level during the day to finish at a heady 1.9633 per cent.

To put this in context, the equivalent debt of economic powerhouses such as the US and the UK was trading at a yield of over 2.3 per cent.

Irish bonds, in particular, have been reaping the rewards of a general enthusiasm for peripheral-state debt over recent months. That has been driven by two factors – signs that the debt crisis in the euro zone may be easing and assertions by the European Central Bank that it is ready to act if needs be to ensure that it does.

But even in that environment, current Irish yields are hard to justify.

The benchmark debt of our fellow PIIGS – Portugal, Italy, Greece and Spain – was yesterday trading at 3.484, 2.583, 5.778 and 2.392 per cent respectively, well above our level.

While prices of bonds have been rising generally across Europe in recent weeks, Ireland’s 11.6 basis point contraction in yield yesterday was bettered only by Greece, which has much further to fall. Over the past week, Ireland’s benchmark debt yield has declined by over 12 per cent from what were already historically low levels.

Even before the news from Fitch, the suspicion must have been that Ireland’s current bond yield is building in a lot of the good news that has been signalled in recent economic data from the Central Statistics Office and elsewhere – but that recovery remains fragile.

Figures from Eurostat showing that the euro zone's big three economies – Germany, France and Italy – all either contracted or flatlined in the second quarter has increased the sense of uncertainty across Europe. The Germans reacted to the numbers with equanimity but even there, economic think-tanks were suggesting that the third quarter could also prove challenging and that measures should be put in place now to offset any potential shocks.

The recent data will undoubtedly give Minister for Finance Michael Noonan more room to manoeuvre in October's budget than he might ever have expected. He might be advised, however, to allow for a measure of German reserve. Just in case.