MARKETS:THE PRESSURE on Irish government bonds eased somewhat yesterday, as the yields on 10-year Irish debt fell throughout the day, closing at 8.1 per cent.

Nonetheless, the movements on the bond markets took place against a background of intense speculation and uncertainty, as the weekend’s frenetic speculation as to whether Ireland would tap the EU rescue fund showed no sign of abating.

While the decline in the Irish 10-year yields was welcomed by most as a positive development that would help stave off some of the pressure on Ireland to access outside help, there were some suggestions from market players in London that the fall in bond yields was attributable to the fact the market was pricing in the belief that a bailout is both imminent and inevitable.

Irish bonds gained in value yesterday, bolstering the advances made last Friday on the back of comments from the G20 summit in Seoul, clarifying that holders of debt which matured before 2013 would not be required to take a writedown in the event of a default.

Irish 10-year bond yields declined to 8 per cent, down from their peak of more than 9 per cent last week.

The yields on shorter-term Irish sovereign debt issuance also fell, with the yield on two-year Irish government debt falling back to 5.376, while three-year money also gained in value, bringing yields down to 6.4.

The yield difference, or spread,over the benchmark German bund narrowed 25 basis points to 538 basis points, or 5.38 percentage points.

However, the market response to the fall in yields was extremely cautious.

Highlighting the “lack of clarity” in the markets, AIB’s chief bond economist Oliver Mangan said an element of market correction was at play in the Irish bond markets yesterday, as Irish government bond yields fell from the heights of last week.

International market comment was more negative, with international news agencies rife with speculation that some form of bailout was imminent.

As bond yields fell yesterday, the Government persistently rebutted claims that it had sought activation of the European stabilisation fund.

The €750 billion fund, €450 billion of which relates to the Luxembourg-based European Financial Stability Fund, was established in May and has not yet been utilised by any of the 16 member states.

Minister for Finance Brian Lenihan said it “makes no sense” for Ireland to request aid from the European Union, reiterating that the country is fully funded to mid-2011. “This country is not in a situation or position where it is required in any way” to apply for assistance, he said.

Euro Group chief Jean-Claude Juncker said that Ireland had not requested aid and that a deal was not imminent. “They are not near the point where they would ask for external help,” he said.

Speaking yesterday evening after markets closed, Taoiseach Brian Cowen said the Government is making no aid application “for the funding of the State” and that he does not expect any concrete agreement to come out of the EU talks that begin this evening in Brussels.

Nonetheless, investor focus is increasingly turning to this evening’s meeting of finance ministers, which will be attended by Klaus Regling, the head of the European Financial Stability Fund. There is also speculation that Central Bank governor Patrick Honohan may attend.

The concern about the perilous state of Ireland’s finance is now strongly focusing on the funding position of the Irish banks, and its implications for the State, which is effectively responsible for the banks as a result of the bank guarantee.

Yesterday, NCB Stockbrokers said in a note that they expect Bank of Ireland’s capital position to continue to be eroded by loan losses and that further cash-calls from shareholders or the State are all but inevitable, with a partial conversion of the residual government preference shares likely.

Irish banking shares continued to be extremely volatile yesterday.

There were also reports late yesterday evening that the State may pump more cash into the banks to push their capital above the regulatory targets set in March to allay concern about rising loan losses.