GOVERNMENT bond prices have risen on the Irish market, with investors relieved that the European summit was successful in reaching agreement on the fine print for the single currency, and particularly the terms of the Stability Pact.
Gilts were weaker in early trading on worries that the summit would conclude without agreement, and at one stage the five year benchmark gilt had fallen to a level where it was yielding 6.30 per cent.
Later trading, however, saw the five year stock move sharply upwards to close on a yield - or long term interest rate - of 6.12 per cent compared to the 6.26 per cent close on Thursday.
The gains were more pronounced the longer the maturity of the bond, and the yield on ten year gilts fell from 6.79 per cent on Thursday to 6.68 per cent. The 20 year gilt also made substantial gains and the yield fell from seven per cent on Thursday to close on 6.90 per cent at yesterday's close.
Dealers said there was a general feeling of relief that the summit had reached an agreement, and in theory the ratification of the terms for a single currency should mean that the yield gap between German and Irishbonds should gradually narrow between now and the introduction of the single currency in 1999.
Most investment portfolios are by now closed off for the year and dealers said that any serious "convergence trading" is likely to resume in the new year at the earliest.
The money market, however, provided a relatively mute reaction to the outcome of the summit and one month rates - the key determinant of retail interest rates - were unchanged on 5 3/4 per cent. However, the decision is likely to boost the short term interest rate market over the coming weeks.
European debt futures sprang into life late yesterday, relieved to see that the heads of government had hammered out a deal on the Stability Pact for countries joining the planned single currency in 1999.
The markets have taken it as a very positive step," said a futures broker on London's LIFFE floor. March German bond futures, which spent most of the session in negative territory, powered ahead after news of the deal, and were trading sharply higher at the close.
The Stability Pact agreement states that EMU members would be exempt from fines if their economies shrunk by more than two per cent in any one year, a measure which analysts said was relatively strict.
Politicians would have to rule whether to impose penalties if shrinkage of between 0.75 and two percent occurred.
"There is this discretionary area which is between minus 0.75 and minus two per cent which I regard as pretty tough,"said Mr Glenn Davies, chief UK economist at Credit Lyonnais in London.
Analysts said the deal should be encouraging for the German bond market with German Finance Minister, Mr Theo Waigel, saying the pact would ensure that the euro will be a hard currency.
"The fact that the two per cent is in there will give a psychological advantage to the Germans," said Mr Brian Venables senior bond strategist at ABN AMRO Hoare Govett in Amsterdam.
If these analysts are correct and the German bond market does move higher, then it is reasonable to believe that the Irish market consistently seen by Irish analysts as cheap compared to international bonds should also make solid gains.
Despite the fact that the pound remains in a close trading range against sterling and has deviated markedly against the mark in recent weeks, market sources believe that the Stability Pact agreement will boost confidence in the Irish gilt market.
The pace of convergence between Irish and German bond yields will be the main question occupying the minds of economists with Irish institutions and stockbroking houses over the weekend.
