Irish Bonds Outperform German Bunds on Speculation Austerity Plan to Pass
Irish 10-year bonds rose, outperforming German bunds, amid speculation the nation’s parliament will approve a government austerity plan, allowing Prime Minister Brian Cowen to win an international bailout.
The Irish securities climbed for the fifth day in six as people with knowledge of the transactions said the European Central Bank bought the nation’s debt today. German bonds slumped, sending the yield on benchmark 10-year bunds to an almost seven-month high.
“In order to maintain stability it would be reasonable to expect the ECB to be active in the market,” said Elwin de Groot, a senior market economist at Rabobank Groep in Utrecht, Netherlands. “The budget is important because we need some strong political signals” from Ireland, he said. “Not passing it would be viewed as a negative,” de Groot said.
The 10-year Irish bond yield fell 16 basis points to 8.22 percent as of 4:50 p.m. in London. The 5 percent security maturing in October 2020 gained 0.895, or 8.95 euros per 1,000- euro ($1,334) face amount, to 78.81. Credit-default swaps on Ireland declined 18 basis points to 537.3, according to CMA prices.
The ECB bought Irish and Portuguese government bonds today, according to at least two people with knowledge of the transactions. Central banks were also buying Greek debt, said one of the people, who asked not to be identified because the deals are confidential. A spokesman for the ECB in Frankfurt declined to comment.
Irish bonds have handed investors a 10 percent loss since June, the most for government bonds tracked in indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, amid concern that saving the nation’s banks would overwhelm government revenue.
Ireland’s Finance Minister Brian Lenihan started to lay out the 2011 budget, with 6 billion-euros worth of spending cuts, in Dublin at 3:45 p.m. It must pass for Ireland to secure an 85 billion-euro aid package it sought from the European Union and International Monetary Fund last month.
“The risks are skewed to the Irish budget passing, but if there are hiccups that would be a major blow to the rescue,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London.
Bonds from so-called peripheral nations rallied last week as traders said that the ECB increased purchases of government bonds. ECB President Jean-Claude Trichet said on Dec. 2 that the central bank will maintain its bond-buying program and continue to sterilize asset purchases.
Klaus Regling, who manages the 440 billion-euro part of the bailout fund financed by euro-area governments, said a first sale of 5 billion euros of bonds to finance Ireland’s package is scheduled for the second half of January.
German bonds declined as Treasuries fell and stocks advanced after U.S. President Barack Obama agreed to extend tax cuts. The benchmark bund yield rose 10 basis points to 2.95 percent, after touching 2.96 percent. the highest since May 13.
The Stoxx Europe 600 Index climbed 1 percent, while the yield on the 10-year U.S. Treasury advanced 16 basis points to 3.08 percent. The difference in yield, or spread, between two- and 10-year German debt rose to 208 basis points, the most since June 22.
German bonds may come under pressure as the nation is compelled to lend more support to high-deficit nations to keep alive the euro area, according to BNP Paribas SA. The nation led opposition to an increase in Europe’s crisis-aid fund or the introduction of joint bond sales as European finance ministers met in Brussels yesterday.
“The lack of improvement and key structural decisions is seen as a risk for the euro zone as a whole,” BNP Paribas interest-rate strategists said in a research report today. At some stage “deterioration” of peripheral euro-area nations’ bond markets “will weigh on all European government bonds,” they wrote.
Portuguese bonds fell after European finance ministers yesterday ruled out immediate aid for the nation yesterday.
The yield on the Portuguese 10-year bond climbed six basis points to 6.15 percent, while Greek 10-year yields increased 16 basis points to 11.82 percent.
“Right now I see no need to expand the fund,” German Chancellor Angela Merkel told reporters in Berlin yesterday. European treaties don’t “allow euro bonds, as far as we’re concerned.”
‘Something Bad or Something Big’
Meetings of the region’s policy makers today and next week may be a last opportunity to tackle the sovereign-debt crisis before a bond “supply frenzy” in early 2011, Royal Bank of Canada Europe Ltd. said.
“If nothing has been done by then and markets have not miraculously turned around, things may turn nasty, so either something bad or something big is likely to happen,” Peter Schaffrik, head of European rates strategy in London, and Jens Larsen, chief European economist, wrote in a research report yesterday.
Ten-year Spanish yields were little changed at 5.22 percent, while Italian yields advanced one basis point to 4.53 percent.
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