Irish hopes of return to markets

The bond markets have reacted favourably to the last EU summit and Monday’s meeting of eurozone finance ministers.

Irish bond yields are hovering around the 6.7% level, which represents a significant narrowing of yields on government debt over the past six months and augurs well for a return to the bond market towards the end of this year or the beginning of 2013.

Last week the Government successfully issued €500m three-month Treasury Bills, but Lorcan Kelly, chief european strategist with investment advisory firm Trend Macro, says the Government should test the market for much longer dated debt.

“The Government should issue a €3bn-€5bn 10-year bond towards the end of this year or the start of next year. The Government has to be serious the next time it goes into the debt market. There is very little significance about last week’s treasury bill auction.”

Mr Kelly argues that if the Government is able to raise 10-year debt at yields below 5%, then that should pave the way for a more meaningful return to the markets.

But it all hinges on the outcome of negotiations on the proposals agreed at the last EU summit and apparently rubber stamped at the eurozone finance ministers’ meeting on Monday, he says.

European heads of state agreed at the last summit that the region’s rescue funds, the EFSF and the ESM will be allowed directly recapitalise banks and buy up sovereign debt on the secondary markets.

The bond markets reacted positively to the news on Monday that funds injected into European banks from the ESM will not have seniority over other bank debt. However, there is still uncertainty over who will ultimately foot the bill for bank recapitalisations.

If Ireland can get a good deal on the restructuring of the promissory notes relating to IBRC, then that will alleviate a lot of short-term funding pressure on the State and further boost the Government’s chances of getting back on the market.

Jean Claude Junker, the head of the eurogroup, will present a roadmap on eurozone fiscal, monetary, economic and political union in October.

Even though trading volumes are very thin, it does not look like there will be a major event on the European bond markets between now and then, says Mr Kelly. Eurozone finance ministers agreed to release €30bn to Spain’s bank rescue fund to prevent any short-term crisis.