Irish bond yields remain high

Yields on Irish Government bonds remained above 6 per cent this evening, a day after a successful auction of €1.5 billion worth of debt.

Bond yields have risen sharply in recent weeks amid concerns over Ireland's sovereign debt and the cost of addressing the Irish banking crisis. Uncertainty around the as yet unknown final cost of the bailout for Anglo Irish Bank has also contributed to investor concern.

Minister for Finance Brian Lenihan said today that an estimate for the cost of the Anglo bailout will be published by the end of the month.

This will "reassure the public and the markets that the costs of restructuring Anglo, while huge, are very manageable," he told the Oireachtas Finance Committee.

This evening, the rate on the benchmark 10-year bond was 6.285 per cent, below today's opening level after earlier hitting a daily high of 6.319 per cent. The spread between Irish bonds and the German bund was 374 basis points.

In an another test, the Government will sell between €300 million and €500 million in a sale of Treasury Bills at 10am tomorrow., an hour before the release of second- quarter economic growth figures. The economy grew 2.7 per cent in the first quarter, expanding for the first time since 2007.

In an editorial today, the Financial Times called on the Government to change a "perverse" policy that was currently pushing up interest rates, and "cut the umbilical cord to the banking system" in a bid to shrink  rates.

"It might mean an Irish banking system with fewer liabilities and more foreign ownership," the newspaper said. "But it would cut sovereign yields and set the deficit on a sustainable path."

Tánaiste Mary Coughlan said this afternoon there would be no change of policy. "This Government is going to continue with the corrective action that is necessary  in our public finances and in our banking system," she told RTÉ Radio today. "We have no intention of defaulting, but we are intent on working through the issues, particularly in Anglo."

She said the Government was "totally coherent" in dealing with the fiscal problems and would continue to deal with its corrective action.

However, Fine Gael's Kieran O'Donnell accused the Tánaiste of keeping her head in the sand. "Anglo Irish bonds are not the bonds issued by the Irish taxpayer. Negotiating down the liability on them is not the Irish taxpayer defaulting on anything," he said. Mr O'Donnell said €5 billion would be added to the deficit over time if Ireland continued to pay 4 per cent more than Germany on its debt.

"This is a serious issue and the Minister is making the problem more difficult of an adjustment if she persists with the policy that now even the Financial Times says is dangerous," he said.

In a note from NCB Stockbrokers this morning, analysts said sentiment may be negative but fundamentals should begin to reassert themselves over the coming weeks.

"The spread over Germany is not consistent with the underlying fundamentals and debt profile, especially seeing as Ireland is fully funded until the second half of 2011 and therefore not facing a liquidity crisis," the report said.

Economist Brian Devine said the spread over Germany has diverged "substantially" from NCB's fair value measure.

Bonds rose around the world, the Dollar Index fell for a third day and gold climbed to a record on speculation the Federal Reserve will put more cash into the economy.

Two-year Treasury yields sank to a record low for a second day and 10-year British gilt yields decreased 15 basis points to 2.97 per cent as of 9.35am in New York. The Dollar Index, a gauge of the currency versus six major trading partners, slid to the lowest level since March 17th. The Stoxx Europe 600 Index lost 0.3 per cent, while futures on the Standard and Poor's 500 Index rose less than 0.1 per cent to 1,140.76.

The Fed said yesterday for the first time that slowing inflation and sluggish growth may need more action.

Portuguese government bonds rose after the country sold €750 million. The yield on the 10-year Portuguese bond fell 8 basis points to 6.11 per cent after the government auctions.

Additional reporting: Bloomberg