UNPRECEDENTED demand from overseas investors powered the Irish bond market ahead yesterday, with the surge being further fuelled late in the day by the extraordinarily strong Exchequer borrowing figures.
One dealer described yesterday's activity as "frenzied" and there seems every likelihood of the market surging again when trading resumes today.
Dealers said that bond prices jumped by between £1.25 to £1.50 at the short to medium end of the market, and the yield on the five year benchmark bond fell from an overnight 6.16 per cent to 5.89 per cent.
Until yesterday, much of the overseas activity was focused on the five year bond, but the demand spread to the 10 year bond yesterday with the yield on the 2006 bond falling from 6.86 per cent to 6.70 per cent.
By any standards, these are extraordinary daily movements in gilt yields and reflect the unprecedented demand from overseas investors.
Bond prices had risen sharply ahead of the Exchequer figures but were given fresh impetus when the Department of Finance reported its first surplus in 30 years, and a likely £300 million undershoot in the budget borrowing forecast of £729 million.
A report by NCB suggesting that the Central Bank will have to cut interest rates by 1 per cent to prevent the pound rising too high also boosted a market which is still reeling from the amount of "convergence trading", where overseas investors are buying Irish bonds in the belief that Ireland will be in the first wave of countries going into European Monetary Union.
No details are yet available for yesterday's bond turnover, but £1.3 billion traded on Tuesday and a phenomenal £1.8 billion last Friday.
This Friday figure is equivalent to 12 per cent of the value of the market trading in a single day and reflects both the overseas buying and market makers actively trading their own books.
Overseas institutions are now thought to have bought a net £1.5 billion of Irish bonds in the past month. The proportion of bonds held by overseas investors has risen from 30 per cent to 40 per cent in the same period.
This "convergence" buying has meant that the differential between Irish and German bond yields has fallen from 1.25 percentage points four weeks ago to 0.79 of a percentage point at yesterday's close.
