Irish bonds not keeping pace with European equivalents

IRISH GOVERNMENT bonds are under-performing their European peers as the faltering housing market combined with sharply deteriorating public finances is leading yield spreads to widen.

Since the start of the year, spreads of 10-year Irish government bonds have widened by 23 basis points against the German benchmark, which means that the Irish Government now has to pay 0.23 percentage points more on 10-year debt than Germany.

Ireland is now just behind Greece and Italy in terms of government bond performance. The Netherlands is one of the best performing markets, with spreads just 10.5 basis points above the German benchmark.

Jan von Gerich, economist with Nordea in Finland, said global risk sentiment combined with Ireland's slowing housing market means Irish bonds are one of the worst-performing in Europe. He added that this could worsen.

Alan McQuaid, chief economist with Bloxham Stockbrokers, said that, given the deteriorating public finances, "it is no great surprise" that spreads are widening. He added that Ireland's reputation in Europe is suffering due to its vote on the Lisbon Treaty, and that this may also be impacting spreads.

Europe's outlying countries are deemed to be particularly vulnerable in the global downturn, and prices of government bonds in countries such as Greece, Italy, Spain and Portugal have suffered. Last Friday, Spain confirmed that it would not issue its planned 15-year bond.

However, as public finances worsen, Ireland may have no choice but to bring a new bond issue to market. The last Government bond issue was in April, when it launched a €7 billion syndicated bond, its largest issue. The bond was priced at 50 bp over the 4 per cent Bund and was considered a success.

Oliver Whelan, director of funding and debt management with the National Treasury Management Agency, said that the April issue should cover its requirements for 2008, but that if conditions are more favourable in the autumn, it might consider pre-funding a portion of next year's requirements.

Next year's borrowing levels will depend on public finances, but Mr Whelan said that with bond redemptions of €5 billion needed in April 2009, it is likely that it will be in excess of €10 billion.