Irish bond yields soar to record highs on 'junk' status


IRELAND SAW its bond yields soar to record highs yesterday after it became the third member of the euro zone to have its credit rating cut below investment grade.

European stock markets enjoyed a relief rally as investors speculated that the recent sell-off sparked by Italian contagion fears may have been overdone, and that a solution to the currency bloc’s sovereign debt crisis may yet be found.

Spanish and Italian debt markets recovered somewhat on hopes that Europe may “sort something out”, a Dublin trader said.

However Irish bonds moved in the opposite direction following Moody’s downgrade of Irish debt to junk status on Tuesday evening.

Yields on Irish two-year money broke through the 20 per cent level yesterday, while 10-year paper traded just above 14 per cent.

Not only did these yields represent euro-era records, they also surpassed anything seen during the currency crisis of the 1990s.

“Until they sort something out in Europe, yields are just going to keep going up,” the trader said.

Citi analyst Jürgen Michels said the sell-off in Irish bonds seen yesterday was likely to continue in the coming weeks. Many investors would only hold bonds that were considered investment grade by credit rating agencies such as Moody’s. However, some investment funds only reshuffle their portfolios at fixed times, for instance when indexes are being rebalanced.

Mr Michels explained that the recent downgrade to junk status of Ireland, Greece and Portugal puts pressure on the holders of the bonds of these countries to offload them “but it does not happen immediately”.

“The pressure will be there in the coming weeks,” he said.

Ireland’s junk rating will make it difficult to get back into the market, he said. “Your investor base is shrinking.”

He said a second Irish bailout was not an option that could be “excluded”.

“It’s more likely than unlikely,” he said.

Reports had suggested that euro zone leaders could come together for an emergency summit tomorrow, although this appeared to have been ruled out last night.

Mr Michels said they must produce a concrete solution.

“If you come together and raise this kind of expectation, then you have to deliver.

“It is not the time for words; it’s the time for deeds.”

When downgrading Ireland, Moody’s said there was an increasing possibility that the involvement of private investors would be required as a precondition for new aid for Ireland.

In a morning note yesterday, Davy Research economist Conall MacCoille argued that it was “not necessarily clear” that this was becoming more likely.

However, he said even the perception of possible private sector participation in a future funding package impaired Ireland’s ability to regain access to private markets in the near term.

“Conditions in European debt markets are likely to deteriorate again unless a sceptical market sees concrete action being taken,” Mr MacCoille said.

Meanwhile credit-default swaps on Portugal and Ireland overtook Venezuela. “It shows how extreme the situation is in Europe that it has overtaken Venezuela,” said Jacques Cailloux, chief European economist for Royal Bank of Scotland Group in London.

“Investors have lost confidence that they’ll get their money back in Ireland and Portugal.”

Contracts on Portuguese debt were at 1,068 basis points yesterday. Swaps on Ireland were at 1,012 basis points. Venezuela default swaps cost 1,001 basis points.

Gold hit a new nominal high yesterday, surging above $1,580 an ounce. – (Additional reporting - Bloomberg)