BOND YIELDS:YESTERDAY WAS a day of relative calm in the bond market following Tuesday's panicked selling of Irish Government debt. The Europe-wide calm, and somewhat more clarity on Anglo Irish Bank's future, caused the yield on the benchmark 10-year government bond to close the day broadly unchanged on its opening, at a shade off 6 per cent.
This is the ratchet at work: on a bad day the yield goes up; on a good day it remains stable. Sooner or later, something will have to give.
Yields on bonds that mature in a shorter timeframe rose, with the two-year bond yield rising by most. It increased by 0.13 percentage points to stand at 3.67 per cent by trading day’s end.
Unlike the 10-year bond, this remains well below its peak in early May. That is what passes for good news these days. The bad news is that the spread on the equivalent German bonds is now enormous, at more than 3 per cent. Put another way, Ireland pays nearly seven times more than Germany to borrow for two years.
Rising yields on shorter maturities gives credence to a report yesterday by Bloomberg, which quoted an anonymous trader as saying the European Central Bank (ECB) was buying longer maturity bonds – including 10-year – of Ireland, Greece and Portugal. The trader claimed the ECB bought €10 million of each country’s debt.
There is no way of knowing if this is correct, nor will there ever be any way of knowing. The ECB as a matter of policy does not give details of purchases beyond a total aggregate weekly figure. Part of the reasoning for this is that by keeping market participants guessing, it creates leverage for the bank. Given that there is no theoretical limit to the amount it can buy, the merest hint it is intervening causes concern for those speculating that already weak bonds will fall even further.
This play, known as shorting, tends to have a self reinforcing effect, driving weak securities even lower (that is the reason Germany moved to ban one particularly aggressive form of shorting in May).
But the ECB has not been doing enough to create downside for short sellers. Last week it bought just €173 million worth of government bonds – a drop in the ocean. Yesterday’s €30 million, if true, was just as piffling. Portugal managed to sell more than €1 billion worth of two-year and 10-year bonds. This helped to calm matters and should help the National Treasury Management Agency’s auction of very-short-term debt this morning. The agency will conduct one of its bimonthly sales of treasury bills (these are essentially the same as bonds, but must be repaid in months rather than years).
Today, financial market traders’ favourite TV channel CNBC is bringing its travelling circus to Dublin. The presenters will not have as a backdrop for their coverage the shiny new conference centre on the Liffey. Instead, they have chosen to broadcast to the planet from outside Anglo Irish Bank’s headquarters on St Stephen’s Green. The coverage will be beamed out from 6am to 6pm.
By the end of the day, the whole world will be sick of seeing the place. Let’s hope that being reminded of the existence of the accursed bank for 12 hours does not further erode international sentiment towards Ireland. Stranger things have happened.
