NTMA sells Irish bonds worth €1.5 billion at auction

The National Treasury Management Agency (NTMA) sold €1.5 billion of bonds in a monthly auction this morning but was forced to pay a higher interest rate.

In what was being seen as a test of the market, there was strong demand for the securities despite turmoil which saw bond yields – equivalent to the interest rate that must be paid on State borrowings – yesterday hit a record high since Ireland joined the euro.

Bond yields have risen inexorably over the last month 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.

This morning the agency sold €1 billion of eight-year bonds at an average yield of 6.023 per cent, compared to 5.088 per cent in June. The number of bids received was for 2.9 times the amount available .

Some €500 million worth of four-year bonds were sold at an average yield of 4.767 per cent, with a bid-to-cover ratio of 5.1 times, compared with 5.4 times at the previous sale.

"People realised that Ireland does not have a liquidity issue and not much of a solvency issue either," said Brian Devine, economist with NCB Stockbrokers. "People recognised this is good value at these yields."

Oliver Whelan, head of funding at the NTMA, said he expects that the "vast bulk" of the securities sold today went to overseas investors. "It's essentially an international base bidding for our bonds," he said.

Willem Buiter, chief economist at Citigroup described today's auction as "great" for investors and "horrible" for taxpayers and the Government.

"From a technical point it was highly successful, over five times oversubscribed," he said. Earlier today he described the current yield on Irish 10-year bonds as a "ridiculous number".

At 5 pm, the Irish 10-year bond yield was 6.29 per cent, after hitting a new high yesterday of more than 6.5 per cent. The spread between Irish and German bund was at 384 basis points. It had previously widened to more than 400 points.

NTMA said the Exchequer is now fully funded until the middle of next year and has borrowed the just over €20 billion required to meet the shortfall between tax revenues and Government spending. The agency said it will go ahead with its next scheduled auction on October 19th.

The NTMA also plans to hold an auction of short-term securities on September 23rd, and hopes to raise between €300 million and €500 million.

Including today's auction, the NTMA said the weighted average cost of funds raised this year is 4.7 per cent, the same as the average funding cost in 2009.

"From a market point of view, this is seen as a stunning good result in terms of demand," said Alan McQuaid, chief economist at Bloxham stockbrokers in Dublin.

"Clearly we're paying higher interest rates. You can't go on paying a premium every single month for an auction. But the NTMA is well funded into next year. We're comfortable in that position."

Fine Gael TD Leo Varadkar said it was a relief for Irish businesses and families to see that the NTMA could raise the funds, but said the higher interest rates were down to a growing lack of international confidence in the Government.

“This auction is an enormous relief for the Government. But the €15 million extra paid by Ireland represents yet more pain for taxpayers and businesses, and means even fewer resources will be left over for job creation. Hard-pressed households and struggling businesses are already paying for the economic crisis, and face further pain in the forthcoming Budget,” he said.

International investors, who hold around 85 per cent of Irish public debt, are still wary, seeking clarity on the cost of dealing with Anglo Irish, expected to be announced around the beginning of October, and the budget on December 7th.

"The problem is these things aren't going to happen today or tomorrow, they are going to happen over a number of months," said Padhraic Garvey, strategist at ING in Amsterdam. "The disturbing aspect of the price action over the past couple of months is that the wider spreads tend to stick and they are going to stick until we get to the point where international investors start to buy."

Separately, Spain sold 12-month bills at an average yield of 1.908 per cent, compared with 1.836 per cent at an auction on August 17th, and 18-month bills at an average yield of 2.146 per cent, compared with 2.078 per cent at the prior sale.

The yield on its 10-year bond dropped 5 basis points to 4.19 per cent.

The Spanish 10-year gap with bunds shrank by 6 basis points to 1.7 points. The spread on 10-year Portuguese bonds narrowed by 15 basis points to 3.81 points over bunds.

The cost of credit-default swaps to insure European sovereign debt declined, with contracts on Ireland dropping 24 basis points to 421.5, Spain falling 2 basis points to 234, Greece down 11 basis points at 833 and Italy slipping 1 basis point to 193, according to data provider CMA.

Today's rebound came after a Bloomberg survey showed that Germany's biggest bond dealers forecast that yields on Greek, Spanish, Irish and Portuguese bonds would fall to within 2.2 percentage points of benchmark German bunds on average in the next two years. That would be down from 4.61 percentage points last week.

Concern that peripheral euro zone countries may need to seek financial aid escalated as Central Bank governor Patrick Honohan said yesterday Ireland may need to cut its budget deficit at a faster pace, hinting at the requirement for more than the €3 billion of cuts forecast for December's budget.

In a note to clients this morning, Davy said the Government may need to cut more than €3 billion from its budget this year. "Further public spending cuts could reduce sovereign funding costs, but might also reduce private demand," said analyst Aidan Corcoran. "This could lead to a situation of delaying the recovery in order to secure it."

Additional reporting: Bloomberg, Reuters