Bond yields drop to pre-bailout levels

IRISH BOND yields dropped to levels last seen before the State was bailed out and the euro surged the most this year, after EU leaders agreed on measures that could sever the link between banking debt and sovereign states.

There was a general easing across peripheral sovereign debt markets and the Eurostoxx50, Europe’s biggest blue chip index, was lifted 4 per cent in yesterday’s widespread relief rally.

This week’s European Union summit, the 20th since the sovereign debt crisis began, was the first to surprise investors on the upside.

Early on Friday morning EU leaders agreed that ESM funds could be injected directly into banks rather than placed on sovereign balance sheets, a move that could potentially reduce the debt burden of crisis-ridden countries such as Ireland.

The yield on Irish nine-year bonds dropped sharply yesterday, falling from 7.12 per cent to 6.47 per cent, a level not seen since October 2010.

Although this rate is not immediately relevant as Ireland is not raising funds on the open market at the moment, Tánaiste Eamon Gilmore said on radio that the EU deal was a “major game changer” for Ireland that would ease its path back to financial markets.

Spanish and Italian bond yields have been worryingly high in recent weeks, reflecting the low confidence of investors, but they slid yesterday to 5.8 per cent for the Italian 10-year and 6.4 per cent for the Spanish 10-year.

The euro rose by about 2 per cent to $1.2678.

Commodity markets posted their biggest rally for the year.

Oil futures jumped as much as 6 per cent for the day, the biggest gain in a session since February 2011. Copper had its biggest one-day rally in seven months and gold its largest run-up since the start of June.

European equity markets also soared yesterday, with Bank of Ireland proving one of the biggest beneficiaries of the rally. The stock jumped almost 15 per cent to 10 cents.

The relief rally revealed just how low investor expectations had been in respect of this week’s EU summit, which ended yesterday.

“You get agreement on one significant [issue] and the market has a huge run,” a Dublin broker said.

This reaction reflected the lack of direction that has been evident until now, the broker added.

“All of a sudden something materialised and gave the market a bit of a line of sight and put investors at ease,” he said, adding that the market was craving certainty. “It hasn’t been given any direction [from EU leaders] for the last two years.”

However, Ulster Bank economist John Fahey said although yesterday’s announcements were positive, there were still many issues to be addressed in the longer term.

For instance, uncertainty still existed as to whether or not the euro zone’s firewall was large enough.

“They talked about the ESM and access to that, but the actual size of it hasn’t been increased. There is still concern over the size of it,” Mr Fahey said. – (Additional reporting: Bloomberg, Reuters, New York Times service)