Irish 10-year yield rises to 8.5%, spread vs. Germany hits record
LONDON (MarketWatch) — A decision by a prominent clearing house to boost the margin requirement on Irish government bonds added to upward pressure on the nation's borrowing costs on Wednesday, underlining long-term worries about Dublin's ability to meet its financing needs.
LCH.Clearnet, in a notice to members of its RepoClear service, said it was boosting the margin requirement on Irish government bonds by 15% of net exposure. The higher requirement will be reflected in a margin call on Friday, the firm said.
The yield on 10-year Irish government bonds jumped to around 8.5% in mid-afternoon European action, driving the yield premium demanded by investors to hold Irish bonds to more than 6 percentage points, a record.
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The move "adds another layer of uncertainty" to the outlook for Ireland, said David Schnautz, fixed-income strategist at Commerzbank. Ireland has seen borrowing costs soar as worries have mounted about the cost of the bailout of the nation's troubled banking sector.
Ireland has a substantial cash cushion that most strategists expect to allow it to sit out of the credit markets until well into next year. But the sharp rise in bond yields has served to stoke fears the nation may eventually have little choice but to turn to the bailout program put in place earlier this year by the European Union and the International Monetary Fund.
Schnautz said remarks by Irish central bank chief Patrick Honohan didn't aid sentiment. The central bank governor said the government's budget-cutting plan is of the type that the IMF would want it to pursue.
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Honohan, however, was arguing that it would be difficult to see support measures as a remedy for the nation's fiscal ills, Dow Jones Newswires reported.
"My take would be that the sort of policy package that the IMF would want to see Ireland doing is very much the sort of policy package that the government is putting together on the fiscal side," he said at a conference in Dublin, according to Dow Jones Newswires.
Antonio Garcia Pascual, an economist at Barclays Capital, said the sharp rise in Irish bond yields over recent weeks is more a reflection of "very negative market sentiment" and a run of negative news articles rather than any change in underlying macroeconomic and financial fundamentals.
Recent reports have focused on the quality of bank-held portfolios that haven't been transferred to the National Asset Management Agency and the potential for further deterioration of those portfolios amid potential for rising mortgage losses.
Concerns about the Irish government's ability to pass its budget proposals have also contributed to pressure on bonds, Pascual said.
Meanwhile, sovereign yields in Ireland, Portugal and Greece have all risen sharply in the wake of Germany's call for the creation of a plan that would require private sovereign-debt holders to share some of the pain associated with any debt restructuring within the euro zone.
Portuguese auction in focus
The cost of insuring Portuguese debt against default rose Wednesday after the government auctioned 6- and 10-year government bonds. The yield on the 10-year bond sold at auction jumped to 6.8% from around 6.4% at a previous auction, while demand fell.
The spread on five-year Portuguese credit default swaps widened to 467 basis points from around 454 basis points on Tuesday, according to data provider CMA. That means it would cost $467,000 a year to insure $10 million of Portuguese debt against default for five years, up from around $454,000 on Tuesday.
The Irish CDS spread widened to nearly 585 basis points from 567.
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Schnautz said there is little reason to expect turmoil in sovereign-debt markets to subside soon. A sharp widening of bid/ask spreads means that while it is painful to maintain holdings of peripheral debt, "exiting a position can also be painful."
The typical tightening of liquidity seen toward the end of the year may also exacerbate volatility, he said.
Pascual, in a note to clients, said it's clear that the Irish government won't fund itself at current market yields.
The yield premium over German bunds may narrow once the government's four-year budget plan is approved, remaining NAMA transfers are completed and a further extension of the government's guarantee program is approved by the European Commission, he said.
Otherwise, the government is likely to find it more attractive to take advantage of funding provided by the EU rescue plan and the IMF, he saidhttps://sites.google.com/site/goldandsilver2012/latest-gold-news/f-1
By William L. Watts, MarketWatch
http://www.marketwatch.com/story/margin-boost-other-woes-hammer-irish-bonds-2010-11-10?dist=countdown
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