Irish Debt Surges by Most Since May 10 EU Bailout Plan on G-20
Irish government bonds surged, driving yields down by the most since the European Union crafted a 750 billion-euro ($1.03 trillion) bailout package in May, as Group of 20 leaders held talks on the region’s debt crisis.
The gains sent yields on the two-year notes of Ireland, Portugal and Greece down by at least 70 basis points each. Irish and Spanish 10-year bonds climbed for the first time in 14 days. Italian securities recovered losses after the nation sold almost 8 billion euros of debt. Ireland’s Finance Ministry said in an e-mailed statement it had made no application for emergency funding from the European Union. German bunds declined.
“The G-20 statement was beneficial for Irish debt and that spread across to other peripherals,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “It’s encouraging to see some stabilization and some spread-tightening from Ireland to Portugal and Greece.”
The Irish two-year note yield dropped 81 basis points, or 0.81 percentage point, to 6.89 percent at 5:04 p.m. in London. The 3.9 percent security maturing in March 2012 jumped 0.94, or 9.4 euros per 1,000-euro face amount, to 96.39. The 10-year yield tumbled 76 basis points to 8.36 percent.
The yield on the 10-year bund, the euro-region’s benchmark security, rose eight basis points to 2.52 percent. The two-year note yield gained nine basis points to 1.04 percent.
The extra yield investors demand to hold the Irish 10-year debt instead of benchmark German bunds dropped as much as 86 basis points to 560 basis points.
‘New Mechanism’
Portuguese two-year yields tumbled 310 basis points on May 10 after European policy makers announced the unprecedented loan package and a European Central Bank program of bond purchases to stem the sovereign-debt crisis, which threatened to shatter confidence in the euro.
Irish two-year yields plunged 297 basis points that day, while Greek note yields sank 1,073 basis points.
“Any new mechanism would only come into effect after mid- 2013 with no impact whatsoever on the current arrangements,” the ministers of Germany, France, Italy, Spain and the U.K. said in a statement distributed to reporters in Seoul today during the Group of 20 summit.
Ireland’s gross funding need for 2011 will be 23.5 billion euros, falling to 18.6 billion euros in 2014, the nation’s debt agency said. The funding need will be 20.7 billion euros in 2012 and 18.9 billion euros in 2013.
Credit-Default Swaps
The funding requirement for 2011 includes 3.1 billion euros of banks’ promissory notes, the National Treasury Management Agency said in a presentation on its website dated yesterday. In a footnote published subsequently, the NTMA said that “the future borrowing plan for the NTMA is subject to the final exchequer borrowing requirement in the Four-Year Budgetary Plan and Budget 2011.”
Ireland led a decline in the cost of insuring government debt in Europe, according to data provider CMA. Credit-default swaps on Ireland dropped 57.5 basis points to 537.5, Portugal fell 37 to 441, Spain declined 16 to 263, Italy was 16 lower at 186 and Greece was down 17 at 864.
While Ireland is fully funded until the middle of next year, the extra yield investors demand to hold Irish 10-year government bonds rather than German bunds, the euro-region’s benchmark security, reached a record 652 basis points yesterday.
Investors should buy Irish bonds as prices overstate the likelihood of default, according to NCB Stockbrokers Ltd.
‘Rational’ Purchase
“On the assumption of a 70 percent recovery rate, the Irish 10-year bond yield and 10-year credit-default swap imply that there is an 85 percent probability of Ireland defaulting sometime in the next 10 years,”Brian Devine, chief economist at NCB in Dublin, wrote in a report today.
“This overstates the probability of Ireland defaulting and we therefore conclude that it is rational for investors to purchase Irish bonds as opposed to risk-free bonds at the prevailing rates,” he wrote.
Peripheral nations’ bonds have dropped since European Union leaders agreed on Oct. 29 to consider German Chancellor Angela Merkel’s proposal for a permanent rescue mechanism as of 2013 that would involve restructuring with losses for private holders of sovereign debt. The proposal is part of discussions to create a permanent crisis facility to replace the rescue fund created in May after Greece’s near-default.
Portuguese 10-year bonds rose for the first day in five, with the yield falling 35 basis points to 6.88 percent. That narrowed the spread against bunds to 422 basis points, after reaching a record 484 basis points yesterday, according to Bloomberg generic data. Portugal has no more bond sales planned this year.
Greece, Italy
Greek bonds gained, with the 10-year yield dropping 22 basis points to 11.53 percent, driving the spread against similar-maturity bunds to 894 basis points from 916 yesterday, according to Bloomberg generic data.
That compares with the record 973 basis-point premium reached May 7, before the EU rescue.
The Greek government plans to sell 300 million euros of 13- week Treasury bills on Nov. 16, the nation’s Public Debt Management Agency said today.
Italian 10-year bonds recouped earlier losses after the nation sold 7.92 billion euros of 2015, 2026 and 2034 debt. That compared with the 8.25 billion euros indicated before the sale.
The Italian 10-year bond yield fell eight basis points to 4.17 percent after rising to as much as 4.33 percent earlier today. The 10-year Italian-German yield spread narrowed 15 basis points to 165 basis points, after reaching 190 basis points earlier, a euro-era record.
Peripherals Rally
Peripheral bonds extended their rally as traders cited speculation that a report by Medley Global Advisors, a consulting firm used by hedge funds, said EU talks were underway that will lead to a financial-rescue plan for Ireland as soon as next week. Mike Cronan, vice president of sales at Medley in New York, declined to comment.
“The rumor that the Irish are going to access the European Financial Stability Facility is the reason that bonds are performing,” said Harvinder Sian, a senior fixed-income strategist at Royal Bank of Scotland Group Plc in London. “Because it’s Medley, it’s being taken seriously.”
The European Commission said it hasn’t received an aid request from Ireland and won’t disclose possible preparations for a financial package.
No Comment
“We have not received a request from the Irish government for any financial support, so therefore we’re not commenting on any speculation,” commission spokesman Olivier Bailly told reporters in Brussels today. “We will not comment on any possible preparatory work.”
Spanish 10-year bonds rose for the first day in 14, matching the longest run of declines since Bloomberg began collecting the data in 1993. The Spanish bond yield fell 11 basis points to 4.55 percent after increasing to 4.78 percent.
The price gains pushed the Spanish-German yield spread down 20 basis points to 200 basis points, after reaching 229 basis points earlier today. That compares with an intraday euro-era high of 232 basis points reached on June 17. Spain is scheduled to sell 2020 and 2041 bonds on Nov. 18.
German bonds have returned 8.5 percent this year, versus an 8.4 percent gain for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek debt has lost 19 percent, Portuguese bonds lost 10.8 percent, while Irish securities declined 15.3 percent, the indexes show. Italian bonds returned 1.5 percent, while Spanish debt lost 1.1 percent, according to the indexes.
To contact the reporter on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
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