Irish bond yields rise as budget talks in Portugal fail

IRISH BOND yields spiked yesterday as the collapse of Portugal’s budget discussions and Greece’s tax revenue shortfalls reignited concerns that peripheral European countries may struggle to cut their deficits.

The yield on Ireland’s 10-year bonds closed at 668 basis points yesterday, the highest level in almost a month, while the spread between Irish sovereign debt and the benchmark German bund rose to 412 basis points, up from 393 on Tuesday.

However, Dublin analyst Donal O’Mahony of Davy stockbrokers said these movements should be interpreted with extreme caution as volumes were currently “wafer thin”. As a result, Irish bonds were in a “bit of a no-man’s land” and were “like confetti in the wind” for the time being.

Ireland was the second worst performer in Europe yesterday, after Greece, in terms of widening spreads.

Greece’s 10-year yield rose 79 basis points, the most since June 15th, and its spread with bunds widened to 779 basis points, the highest in more than three weeks. The yield on Portugal’s 10-year bond increased 24 basis points yesterday, the most since September 20th. That left it at 328 basis points, up from 312 earlier in the day.

Mr O’Mahony noted that Irish bonds had enjoyed two “robust” sessions on Monday and Tuesday, with the spread against bunds narrowing. However, that improvement was “scuppered” yesterday by the developments in Portugal.

Portugal underwent a dramatic about-turn in the bond market yesterday morning, he said, and, together with Greece, brought other peripheral economies such as Ireland with it.

Yesterday news agency Bloomberg reported that bond investors were losing faith in Ireland’s plan to lower the deficit as spending cuts threaten to undermine economic growth, reducing Government revenue.

The report quoted Ralf Ahrens, head of fixed income at Frankfurt Trust, as saying there was a danger for countries such as Ireland with huge deficits that cutting spending would not be enough and the situation would deteriorate. – (Additional reporting Bloomberg)