Irish Bond Yields Fall to Four-Month Low on Plan to Exit Bailout

Irish government bonds rose, pushing 10-year yields to the lowest level in four months, as the country said it is preparing to exit the financial bailout program that it entered almost three years ago.

Italian and Spanish securities also advanced. German bonds were little changed as U.S. lawmakers struggled to reach an accord on raising the federal debt limit three days before America’s borrowing authority lapses. Investors should buy Spanish bonds as the government reforms improve the nation’s finances, according to Royal Bank of Scotland Group Plc.

“The news that Ireland plans to exit its bailout program is maybe also proving positive for the other peripheral countries,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “Spain and Italy are in a different camp from Ireland but I wouldn’t rule out a bit of sentiment coming across. However, the U.S. debt issue is still dominating everything and there remains hope this can get resolved, which is keeping yields stable.”

Ireland’s 10-year yield fell four basis points, or 0.04 percentage point, to 3.67 percent at 4:34 p.m. London time, the lowest level since May 31. The 3.9 percent bond due in March 2023 rose 0.35, or 3.50 euros per 1,000-euro ($1,359) face amount, to 101.80.

‘Potential Backstops’

Irish Finance Minister Michael Noonan will travel to meet European and International Monetary Fund officials within the next two weeks to discuss how best to manage the bailout exit, ministry spokesman Paul Bolger said. The talks will center “on what options may be available to Ireland as it exits the bailout, including potential backstops,” he said.

Both Ireland and Spain have seen very important economic turnarounds, European Union Economic and Monetary Affairs Commissioner Olli Rehn said today in Luxembourg.

Ireland’s building industry expanded last month for the first time since the country’s 2007 property market collapse as home construction increased, Ulster Bank said today, citing a survey of purchasing managers.

Italy’s 10-year yield declined two basis points to 4.26 percent after falling to 4.25 percent, the lowest level since Sept. 26. Similar-maturity Spanish yields dropped two basis points to 4.27 percent.

Spain Bet

Investors should bet Spanish bonds will rise through the end of this year as the nation’s adjustment story is just behind Ireland’s, according to Harvinder Sian and Michael Michaelides, fixed-income strategists at RBS in London. They are likely to outperform Italian securities, known as BTPs, they said.

“We think one of your structural trades is to be long SPGBs, outright or against BTPs, on a recovery story in terms of reforms,” the strategists wrote in an e-mailed note dated Oct. 11. “Market sentiment will be that Spain is just several quarters behind this Ireland story.”

Bonds from Greece, Spain, Ireland, Portugal and Italy all advanced in the past month, extending their average returns this year to 13.5 percent, according to Bloomberg World Bond Indexes. German bonds returned 0.9 percent in the month through Oct. 11, the indexes show.

The benchmark German 10-year yield was at 1.86 percent after climbing to 1.88 percent on Oct. 11, the highest level since Sept. 24.

With the U.S.’s borrowing authority set to lapse on Oct. 17, Senate Majority Leader Harry Reid said yesterday he had a “productive conversation” with Minority Leader Mitch McConnell without reaching a conclusion on a plan to send to the chamber for a vote.

Partial Shutdown

While optimism also was expressed by Democratic and Republican senators on Sunday television talk shows, there was little evidence to support their words as the government’s partial shutdown entered its third week and the markets are weighing the short time left to avert a U.S. default.

“We are very much looking for any headlines from the U.S.,” said Michael Leister, a senior rates strategist at Commerzbank AG in London. “There was expectation on Friday that an agreement was getting closer, and now it turns out that is not really materializing. The market is jumping on any kind of signals.”

Germany sold 2.8 billion euros of six-month securities today at an average yield of 0.0363 percent, down from 0.0461 percent when the nation last sold similar debt on Sept. 9. France auctioned a combined 7.3 billion euros of bills.

U.S. Treasuries trading is closed today for Columbus Day, while the stock markets are open.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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