Bond yields up ahead of auction

Bond yields rose again today ahead of tomorrow's scheduled auction by the National Treasury Management Agency (NTMA), reaching 6.5 per cent.

Yields on 10-year Government bonds moved to a new record high of 6.503 per cent before falling back to 6.48 per cent by market close. The spread between Irish bonds and German bunds was 401 basis points.

The NTMA is to test market sentiment towards Ireland tomorrow with a sale of up to €1.5 billion worth of bonds.

Goodbody stockbrokers this morning said Ireland is likely to pay a slightly higher yield in the auction.

"Skipping a scheduled monthly auction may prove to be counter-productive and send out the wrong signal to the market," said economist Dermot O'Leary. "Paying a slighter higher yield for the issuance is, therefore, likely to be a price worth paying.

Minister for Finance Brian Lenihan said this evening the market concerns leading to the rise in borrowing costs were related to concerns about the banks and not the austerity measures being taken to reduce the budget deficit.

“The main worries that have been expressed in the markets are about the banks, and those difficulties are being addressed.”

He said the Government was taking “stabilising measures” to restore confidence in the Irish economy. He added that comments by Fine Gael last week that Ireland should negotiate with Anglo Irish Bank Corp bondholders were "not helpful."

He made the comments to reporters in Dublin this evening. Kieran O'Donnell, Fine Gael’s deputy opposition finance spokesman, had said the Government should negotiate "on a fair and equitable arrangement" with bondholders.

Fine Gael's finance spokesman Michael Noonan said the market crisis is being fuelled by political instability and a growing lack of confidence in the Government's economic plan. He called for a general election to provide certainty.

"While I do not believe that the underlying economic circumstances in Ireland justify these high rates, there is a growing lack of confidence domestically and internationally that this Government knows what it is doing when it comes to fixing the banking sector and the wider economy," he said.

Nomura International said this week's bond sales by Ireland and Portugal offer investors "good buying opportunities" after the debt's recent declines.

"The concessions that are likely to be built into the curves ahead of this week's auctions may create good buying opportunities given the recent tendency for actual peripheral sales to be smooth," a team of European interest-rate strategists led by Nick Firoozye in London wrote today in an investor note. "We remain constructive on Ireland relative to current pricing."

Bond yields have risen in recent weeks amid fears that the State would eventually have to turn to the EU and the International Monetary Fund (IMF) for a bailout. However, Minister for Finance Brian Lenihan has said the Government was not facing difficulty raising funds.

Today, the European Union's Economic and Monetary Affairs commissioner Olli Rehn also said he was confident that Ireland would deal with the current problems and repair the financial system.

Separately, the head of Europe's bailout fund Klaus Regling said his "central scenario" is that no country will seek aid from it. "That's based on the assessment that all the member states are moving in the right direction," he said.

Glas Securities said the Government has over €20 billion on hand, lessening any need to seek outside aid.

"Reports that Ireland may be forced to call on aid from the EU and IMF are overstated in our view," the Dublin-based firm said. "It is worth reiterating that the NTMA is fully funded for the year. We also note that there are exchequer cash Balances in excess of €20 billion that the country could call upon before even considering any calls to the EU/IMF."

Additional reporting: Bloomberg