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Central Banks in Europe Said to Have Purchased Irish Notes; Yields Decline

European central banks bought Irish government bonds today, according to two traders who witnessed the transactions, following a week of speculation about the health of the nation’s banks that sent the securities plunging.

The central banks made light purchases of Irish debt with maturities no longer than two years, the people said, under condition of anonymity because their trading is private. The ECB returned to the market in afternoon European trading to buy more 2012 Irish notes, one person said.

Borrowing costs rose at an Irish debt auction today even as central bank Governor Patrick Honohan said the premium investors demand to hold the nation’s bonds instead of German ones is “ridiculous.” The European Commission this week approved an injection of as much as 24.5 billion euros ($31.5 billion) into Anglo Irish Bank Corp., the lender nationalized in 2009 as the property boom collapsed. That’s more than the 22 billion euros Finance Minister Brian Lenihan had said the bank might need.

“The ECB buying allows the Irish government to take a little longer to get its house in order, or dig its own hole,” said Ciaran O’Hagan, a fixed-income strategist at Societe Generale SA in Paris. “We have yet to see concrete evidence of progress in reining in the budget deficit.”

Irish two-year notes rose for the first time in six trading days, pushing the yield down five basis points to 3.18 percent as of 4:22 p.m. in London.

Higher Yields

One of the people said they had seen the European Central Bank buying, while the other said purchases were by the Central Bank of Ireland. Two other people said central banks had asked for prices and not completed any transactions.

“The ECB’s Securities Markets Programme is still in place and we do not comment on specific actions taken under this program,” the Irish central bank said in an e-mailed statement. The ECB and its member banks began buying government securities in May, part of an almost $1 trillion designed to defend the euro in the wake of Greece’s budget crisis.

A press officer for the European Central Bank declined to comment.

Irish two-year yields have crept higher every day since Aug. 4, when they ended the day at 2.38 percent. Irish 10-year yields fell relative to benchmark German bunds today for the first time in four days, narrowing the spread by two basis points, or 0.02 percentage point, to 288 basis points.

Ireland sold 1 billion euros of bills today. The country sold 500 million euros of securities due Feb. 14, 2011, at an average yield of 2.458 percent, the National Treasury Management Agency in Dublin said.

Next Auction

That compared with 1.367 percent at a July 22 auction of the same bills. Ireland also issued 500 million euros of securities due April 18, 2011, at an average yield of 2.81 percent, compared with 1.8 percent on July 22.

“Irish debt is in the firing line because of concern over the fate of the country’s banks and its implication on government finances,” said Nick Stamenkovic, a strategist at RIA Capital Markets Ltd. in Edinburgh. “Investors are going to demand higher risk premiums.”

Next week the debt agency will auction a 4 percent bond maturing in 2014 and a 5 percent bond maturing in 2020 on Aug. 17. The agency last month sold 1.5 billion euros of bonds, meaning Ireland has filled 90 percent of its 20-billion-euro borrowing plan for 2010.

“I would not read too much into today’s bill auction and will focus more on bond sales next week,” said Mohit Kumar, a fixed-income strategist at Deutsche Bank AG in London. “The rise in borrowing costs is in line with a rise in yields recently. I wouldn’t call this a bad auction.”

To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

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