Irish Bonds Jump as Government Requests EU-IMF Bailout; Portugal Rallies
Ireland's Finance Minister Brian Lenihan
Crispin Rodwell/Bloomberg
Finance Minister Brian Lenihan told reporters late yesterday the nation will pass some of the money to its banks, with the rest helping the government avoid having to sell bonds.
Finance Minister Brian Lenihan told reporters late yesterday the nation will pass some of the money to its banks, with the rest helping the government avoid having to sell bonds. Photographer: Crispin Rodwell/Bloomberg
Irish bonds climbed after the nation’s government requested financial aid from the European Union and International Monetary Fund. Greek and Spanish debt fell.
German bonds rose as Moody’s Investors Service said it would likely downgrade Ireland’s credit rating by several levels and the Irish Green Party said it would quit the government after the next budget and seek a new election. Ireland becomes the second euro nation to seek a rescue after Greece. The nation will pass some of the money to its banks, with the rest helping the government avoid having to sell bonds, Finance Minister Brian Lenihan told reporters late yesterday.
“An aid package is good for Irish debt, but it was very well flagged,” said Charles Diebel, head of market strategy at Lloyds TSB Corporate Markets in London. “As details emerge, it should add to the relief rally.”
The yield on Irish 10-year bonds fell five basis points to 8.3 percent at 4:54 p.m. in London. The 5 percent security due October 2020 climbed 0.265, or 2.65 euros per 1,000-euro ($1,374) face amount, to 78.28. The bund yield was six basis points lower at 2.64 percent.
The difference in yield, or spread, between German and Irish 10-year bonds widened three basis points, or 0.3 percentage point, to 545 basis points, according to Bloomberg generic data.
The Europe Stoxx 600 Index of equities fell 0.7 percent, while the euro slipped 0.5 percent to $1.3611 after earlier reaching $1.3786.
Goldman Estimate
The bailout may total 95 billion euros, according to Goldman Sachs Group Inc. Ireland needs 65 billion euros to fund itself for the next three years and 30 billion euros for the banks, Goldman Chief European Economist Erik Nielsen said.
Irish 10-year bonds rose last week for the first time since the five days ending Oct. 15 as EU and IMF staff arrived in Dublin to inspect the nation’s banks and begin talks. Irish officials said as recently as Nov. 15 they didn’t need aid.
While Ireland is fully funded until the middle of next year, the yield on Irish 10-year bonds soared to a record 652 basis points above bunds on Nov. 11.
Other peripheral bonds were mixed. Portuguese bonds advanced, with the 10-year yield declining 14 basis points to 6.82 percent. Greek 10-year yields rose 22 basis points to 11.97 percent, while Spanish 10-year yields climbed one basis point to 4.75 percent. U.S. 10-year Treasury yields dropped four basis points to 2.83 percent.
‘Rating Pressure’
“While we should expect some tightening correction, the periphery is not yet out of the woods,” Moyeen Islam, a fixed- income strategist at Barclays Capital in London. “The form of any bank recapitalization is also not consequence-free, as any gains from investment might not be seen until the medium term and may well put the sovereign rating under further pressure.”
The aid package will “crystallize more bank-contingent liabilities on the government balance sheet, and increase the Irish sovereign’s debt burden,” Moody’s senior credit officer Dietmar Hornung said in an e-mailed note today.
Increases in state debt “being discussed exceed the expectation we had in October when we put Ireland’s Aa2 rating on review for downgrade,” he said. “A multi-notch downgrade, leaving the rating of the Republic still within the investment- grade category, is now the most likely outcome of our review of the sovereign credit.”
Ireland has a stable outlook at Standard & Poor’s and Fitch Ratings.
ECB Buying
The ECB bought Irish government bonds today, according to three people with knowledge of the transactions. The central bank bought Irish debt maturing in five years, one of the traders said, declining to be identified because the deals are confidential. A spokeswoman for the ECB in Frankfurt declined to comment.
Today’s bond-price moves compare with a 1.1 percentage point downward surge in the Irish 10-year yield on May 10, when the 750-billion-euro European Financial Stability Facility was created. Greek 10-year yields plunged 4.68 percentage points that day.
Irish government bonds have lost investors 12 percent this year, compared with a 9.1 percent decline on investments in Portuguese bonds, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
Credit-Default Swaps
German securities returned 6.9 percent, French debt 6.5 percent and U.S. Treasuries earned 7.4 percent in the period, the indexes showed. Greek bonds lost 19 percent.
The cost of insuring against losses on Portuguese government bonds climbed the most in almost two months as traders look past the bailout of Ireland to which country will be next to require assistance.
Credit-default swaps tied to Portuguese debt jumped 40 basis points to a one-week high of 460 basis points, the biggest increase since June 1, according to data provider CMA. The contracts, which reached a record close of 478 basis points on Nov. 11, have widened about 118 basis points in the past month. Irish swaps jumped 22 basis points to 525.5.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
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