Irish Yields Jump on Rating Downgrade; Bunds Fall After Auction

Irish 10-year bonds slumped for a sixth day, sending yields to a euro-era record, after the nation became the third in the currency union to have its credit rating cut below investment grade.

German 10-year bunds fell as the nation auctioned fewer bonds than its maximum target. Two-year Irish note yields surged to a record, and Greek and Portuguese 10-year bonds fell, after Moody’s Investors Service yesterday cut Ireland to Ba1 from Baa3, saying the nation is likely to need more rescue financing. Italy’s 10-year bonds were little changed, reversing an earlier advance, as the nation prepares to sell more than 3 billion euros ($4.2 billion) of debt tomorrow.

Ireland’s downgrade “puts the focus back on the euro crisis as a whole,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “Politicians in Italy and Spain are trying to reassure investors that they are working hard to get their public finances in order. There is no quick fix.”

Irish 10-year yields increased 58 basis points to 13.93 percent as of 4:31 p.m. in London, after touching 14 percent, a euro-era record. The 5 percent security due October 2020 fell 1.99, or 19.9 euros per 1,000-euro ($1,417) face amount, to 55.015. Two-year Irish note yields climbed 243 basis points to a record 20.17 percent.

The yield difference, or spread, between Irish 10-year bonds and similar maturity benchmark German bunds widened to a record 11.23 percentage points.

‘Extreme Volatility’

German 10-year bund yields climbed three basis points to 2.74 percent as the nation sold 3.314 billion euros of the securities. The 3.25 percent 10-year bonds were sold at an average yield of 2.70 percent, the Bundesbank said, down from an average yield of 2.96 percent at the last sale of the bonds in June. Investors bid for 1.2 times the amount of securities on offer, down from a bid-to-cover ratio of 1.6 at the previous sale.

“The bid-to-cover of 1.2 is on the weakish side,” said Norbert Aul, a European rates strategist at RBC Capital Markets said in London, “You have seen extreme market volatility in German paper and that doesn’t attract investors.”

Ten-year bund yields slid as low as 2.50 percent yesterday, the least since November, as European finance ministers failed to present a solution to contain the region’s debt woes. Bonds from Italy and Spain slumped yesterday amid concern the debt crisis is spreading, before recovering amid speculation central banks bought securities to stabilize the market.

Italian Auction

The euro gained against the dollar for the first day in four, while Treasuries declined amid renewed demand for higher-yielding assets.

Italy plans to sell up to 1.25 billion euros of 3.75 percent securities maturing in 2016, up to 1.75 billion euros of 4.5 percent 2026 debt and an unspecified amount of 2017 and 2023 bonds tomorrow.

The nation’s finance minister Guilio Tremonti told a banking forum in Rome that part of Italy’s austerity plan will be bolstered and passed by parliament by the end of July 15.

“The ability to fund oneself is the big issue right now,” said Luca Jellinek, head of European interest-rate strategy at Credit Agricole CIB. “The Italian auction tomorrow is very important. Italy has to issue huge amounts, so that’s something the market will be watching.”

Italian 10-year yields were two basis points lower at 5.55 percent, while equivalent-maturity Spanish debt yielded 5.82 percent, three basis points less than the previous close.

Credit-Default Swaps

Kokusai Global Sovereign Open, Asia’s biggest debt fund, is sticking with its bets on Italian bonds, according to Masataka Horii, head of the management team. Italian securities make up 13.7 percent of the $30.3 billion fund’s assets, compared with 7.2 percent in the benchmark it uses to gauge performance, the Citigroup World Government Bond Index, he said.

The Italian-German spread narrowed six basis points to 2.80 percentage points.

Credit-default swaps insuring Irish bonds climbed one basis point to 1,000, signaling a 58 percent chance of the government failing to pay in the next five years, while contracts on Greece fell 25 basis points to 2,265, after earlier rising to a record, according to CMA. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments declined 4 basis points to 280.

Irish Downgrade

The Irish government criticized the Moody’s downgrade, Dublin-based broadcaster RTE reported, citing a finance ministry spokesman. The country has met the targets so far under its bailout program, the spokesman said.

Spain’s Finance Minister Elena Salgado said the nation may need to endure even deeper spending cuts in 2012 than those currently planned.

“There’s no fundamental change in market sentiment because the uncertainty remains high,” Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich, said of Italian and Spanish debt. “There are some investors who are required to get rid of bonds if they are rated junk, so there will be some selling of Irish bonds.”

Portugal’s 10-year bonds fell, pushing the yield up 14 basis points to 12.56 percent, while Greece’s 10-year yields climbed 19 basis points to 16.98 percent.

German government bonds handed investors 2.1 percent this year, compared with a 3.8 percent return for U.S. Treasuries and 3.7 percent for U.K. gilts, indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies show. Irish bonds have lost almost 19 percent, the indexes show.

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