Yield on riskiest Irish bank bonds rises as Italian turmoil rattles markets

Irish State bonds cushioned for the moment as Italian woes evoke euro zone crisis memories

A selloff of subordinated bank debt across the euro zone  comes as the mounting Italian political chaos   triggers  concern that it will destabilise Europe

A selloff of subordinated bank debt across the euro zone comes as the mounting Italian political chaos triggers concern that it will destabilise Europe


The market interest rates, or yields, demanded by buyers of Irish banks’ riskiest bonds have risen to their highest level since last summer as markets become increasingly rattled by political turmoil in Italy.

The yield on Bank of Ireland’s so-called additional Tier 1 capital, a form of subordinated debt, reached 6.65 per cent on Tuesday, the highest since last June, having risen by a quarter of a percentage point in the past three weeks.

The rate on similar bonds at AIB have spiked at a nine-month high of 6.84 per cent, while Permanent TSB’s are now yielding 9.11 per cent, the highest since January 2017. Yields rise when bond prices fall.

The Markit iTraxx Europe Subordinated Financial Index, a gauge of credit default swaps – a form of market insurance – tied to junior debt sold by the region’s lenders, has surged to its highest level in more than a year.

A selloff of subordinated bank debt across the euro zone comes as a mounting Italian political chaos has triggered concern that it will destabilise Europe, stoking memories of the vicious link between government and bank debt markets that was at the heart of the currency-region’s debt crisis.

Italy is in political limbo after the populist League and Five Star Movement’s effort to form a government fell apart on President Sergio Mattarella’s veto on Sunday of their proposed finance minister.

An expected technocratic government is unlikely to survive subsequent parliamentary votes of confidence, which may trigger new elections as soon as the summer.

Bank of Italy governor Ignazio Visco warned on Tuesday that any future government must adhere to European Union rules and not increase public debt or risk an exodus by domestic and foreign investors.

Worries about Spain

The yield on two-year Italian debt broke through 2 per cent on Tuesday for the first time since 2013, reaching as high as 2.76 per cent. The yield on 10-year debt hit 3.42 per cent, up 0.73 percentage points from the previous close.

There were also worries about Spain, where prime minister Mariano Rajoy faces a vote of confidence on Friday, stemming from corruption convictions handed down to people linked to his centre-right People’s Party. Spain’s 10-year bond yields rose to seven-month highs above 1.66 per cent.

While Portuguese bonds also spiked as investors retreated from so-called “peripheral” European government borrowers, traders and analysts said that the Republic appears to be successfully navigating the first real test of the National Treasury Management Agency’s (NTMA) claims that the State has become a “semi-core” euro zone debt issuer.

Buyers of Irish two-year bonds are currently willing to accept a negative interest rate of -0.57 per cent, the lowest since last December, while the yield on 10-year securities has fallen to 0.95 per cent and from 1.03 per cent a week ago.

“Ireland has performed very well, and has distinguished itself from Italy, Portugal and Spain,” said Ryan McGrath, head of fixed-income strategy at Cantor Fitzgerald in Ireland.

Barry Nangle, head of fixed income at Davy, said: “The performance of Irish bonds is good evidence that investors are still looking at Ireland as a ‘semi-core’ debt issuer alongside Belgium and France.”

Still, the yield differential – or spread – between Irish 10-year bonds and the German equivalent have widened to 0.71 percentage points, the most since April last year, as investors pile into German debt, seen as a safe haven, amid the Italian political crisis.

‘Strong position’

Mr Nangle said that the NTMA was in “a strong position” having sold €11.25 billion of bonds so far this year. That compares to its full-year target of raising between €14 billion and €18 billion from long-term bond sales.

Meanwhile, the euro fell 0.76 per cent to $1.1537 on Tuesday to its lowest level against the dollar since last November.

Mr McGrath said that any sharp moves in the currency markets would be the first real signal of contagion, which would have wider implications for bond markets across Europe.

“While the euro has weakened against the dollar, the currency markets certainly aren’t looking at an Italian exit [from the euro zone],” said Mr McGrath.