Recovery is ‘safe’ from rises in yields

RECENT increases in yields on Irish bonds are unlikely to signify a change to investors’ trust in Ireland’s recovery, says a leading economist.

Bank of Ireland’s chief economist, Dan McLaughlin, said a number of factors — including the budget deficit remaining on target; lower than expected interest on EU borrowings; a lower cost to the state from the last round of bank recapitalisations; the NTMA being funded up to the end of 2013; and the sovereign debt ratio possibly peaking at lower than anticipated levels — have lowered the risk outlook.

“August proved a turbulent month for financial markets across the globe. Investors pared risk in the face of a slowdown in global growth, notably in the major western economies, and further uncertainty regarding sovereign debt in the euro area.” said Dr McLaughlin.

“Ireland proved an exception, however, with strong foreign buying helping to push Irish sovereign bond yields sharply lower, both in absolute terms and relative to the rest of the euro area.”

The yield — or interest demanded by bond/debt investors — on two-year Irish bonds is down at around 8%, as opposed to the 22% mark it reached in late July.

“Sentiment can swing sharply, of course, and Irish yields have risen this week amid general risk aversion.

“We share the current consensus view that the economy will show marginally positive growth this year but the available data still implies that any growth will be driven by the external sector, as domestic demand still appears to be very weak with consumer spending clearly in the doldrums.

That dichotomy highlights that Ireland needs the current softness in global growth to be temporary rather than the precursor of a sharper downturn.”