Agency plans to carry on with final two bond auctions

THE National Treasury Management Agency (NTMA) is set to carry on with the final two bond auctions planned for October and November after successfully raising another €1.5 billion in its highly anticipated latest round yesterday.

The agency, which borrows money on behalf of the Government and manages Ireland’s national debt, has stuck with its schedule of 11 bond auctions/borrowing rounds as it aims to raise €20bn this year.

Despite the overall cost of borrowing increasing as the yield on 10-year Irish bonds (the interest rate demanded by investors) has steadily risen.

Yesterday’s auction, viewed as the biggest test yet of investor confidence in Ireland, proved successful. It brought the NTMA up to its €20bn target and meant that the Exchequer, thanks to a carry-over of long-term funding from last year, is now funded up to the middle of next year.

“We’re very pleased to have achieved our stated objective of raising €20bn from the bond markets in 2010. And we note that investor demand has remained firm even in the current difficult market conditions, as evidenced by the fact that we received bids 3.6 times the amount on offer,” the NTMA’s Oliver Whelan said.

However, yesterday’s four-year and eight-year bonds, the majority of which went to overseas investors, were issued at higher interest rates than previously, 4.8% and 6%, respectively, representing a monthly increase of around 1% in both cases.

The success of the NTMA’s borrowing activity this year basically means it does not technically have to go back to the market until the second half of 2011, when the climate could be vastly different.

However, it is expected to continue its regular funding round.

“The NTMA estimates that the funding requirement in 2011 will be €24.3bn. It has two further auctions left in 2010 and, thus, will continue pre-funding for 2011. We fully expect these auctions to go ahead. But, in theory, the NTMA could choose not to enter the markets until the second half of 2011,” NCB Stockbrokers said.

The NTMA said that its working assumption is that it will proceed with the auctions and complete its stated schedule.

The agency is effectively banking on yield spreads narrowing over the coming months, as more clarity on next year’s budget and the full cost of the banking crisis is gleaned.

Willem Buiter, chief economist with Citigroup, added yesterday that the international markets have been over-estimating the risk of Ireland defaulting on its debt and branded as “ridiculous” the current yield spread between long-term Irish bonds and their German equivalent — echoing statements by Central Bank governor Patrick Honohan.