Nine-year government bond drops below 6% - lowest rate since bailout

THE INTEREST rate or yield on the benchmark nine-year government bond – at which investors want to buy Irish debt – dropped below 6 per cent, its lowest level since October 2010, the month before the EU-IMF bailout programme was agreed.

The yield on the government’s 2020 bond fell to 5.97 per cent, strengthening the State’s chances of a full return to the bond markets and emerging from the bailout programme next year without requiring further support.

The decline reflects a stronger appetite among investors to hold Irish sovereign debt following last month’s surprise raising of €4.2 billion in new money from the sale of new five-year and existing eight-year government bonds. The rate has declined from 14 per cent just over a year ago when concerns about the deepening euro zone debt crisis raised Ireland’s notional borrowing costs.

The rate on the 2020 bonds was 9 per cent when the Government applied for the EU-IMF programme in late November 2010.

The “ask” yield at which investors sell the government’s 2020 bonds has been trading below 6 per cent at times since June, while the “bid” yield at which investors buy debt, fell below 6 per cent for the first time yesterday.

The rate fell after the National Treasury Management Agency said it would issue amortising bonds linked to State debt over the coming days following demand from potential investors within the Irish pension funds industry.

The NTMA has said that it plans to raise between €3 billion and €5 billion over the next 18 months on amortising and inflation-linked bonds tied to Irish sovereign debt on maturities of up to 35 years.

These bonds offer investors a steady stream of principal and interest payments over the period.

Spanish borrowing costs also fell yesterday as investors expected that the European Central Bank will buy the country’s bonds in the secondary markets.

Spain borrowed on 12-month bills at a rate that was almost a percentage point lower than during its last sale in July but still at very high rates for one-year money.

The country borrowed €4.5 billion on 12 and 18-month loans.

The yield on Spain’s benchmark 10-year bond yield fell 11 basis points to 6.22 per cent, down from a record high of 7.75 per cent on July 25th, as reports said that the ECB was examining ways to cap Spanish and Italian debt yields.

Italian bond yields also fell and the euro rose to its highest level since July 5th, surpassing a peak reached on August 6th after ECB president Mario Draghi pledged to do all it would take to save the euro.

“Overall, the Irish story is much better than what we are seeing in the rest of the euro zone. Ireland is coming across as diverging from the rest of the euro zone,” said Owen Callan, a senior fixed income dealer at Danske Markets.

He pointed to better Irish industrial production and manufacturing data published this month which showed Ireland has been outperforming the euro zone.