Bond and stock prices hit record levels on the Irish market yesterday as the market responded to Friday's surge in US treasury bond prices, comments about deflation by the Federal Reserve chairman Mr Alan Greenspan and a general movement of funds from the Far East into the more stable European and North American markets.
Almost £1.5 billion was added to the value of the Irish stock market as share prices - particularly the banks - surged in response to movements on overseas markets. And Irish gilts maintained their impressive performance with a sharp rise in prices, although the gap against German bonds actually widened fractionally to 0.27 of a percentage point. This yield gap against German bonds compares to gap of over 3 per cent at the time of the 1993 devaluation.
The upward movement in European stock and bond prices is being driven by Wall Street. In New York yesterday the yield on 30-year treasury bonds fell to 5.74 per cent, the lowest since the US Treasury began issuing 30-year bonds 20 years ago.
And the New York stock market also shook off the overnight slump on Far Eastern markets where Hong Kong share prices fell 3.5 per cent, Tokyo 2 per cent, Kuala Lumpur 4.4 per cent and Singapore. From a strong start, the Dow Jones Industrial Average closed on......... , a gain of ........on the day.
Dealers largely attributed Monday's rally to Mr Greenspan's weekend speech in Chicago, in which the Fed chief spoke of the negative economic implications of deflation, particularly asset-market deflation.
"Some observers have begun to question whether deflation is now a possibility, and to assess the potential difficulties such a development might pose for the economy," Mr Greenspan said in a speech to the American Economic Association on Saturday.
The Fed chief's comments helped reassure investors that no central bank interest-rate increase lurked on the horizon, said Matthew Alexy, chief market strategist at Credit Suisse First Boston.
Irish bonds moved in tandem with European bond markets and especially German bonds where the yield on the 10-year bund fell to a record level of 5.19 per cent.
German bund futures indicate that further gains are likely with little in the form of economic news to reverse the trend ahead of the publication of US non-farm payroll figures next Friday.
While last month's non-farm figures indicated strong growth in employment, the markets seemed content to live with this strong employment growth as long as US inflation remains low. This reaction is likely to be repeated next Friday as long as the employment figure is not excessive.
In Dublin, the gains in New York and Frankfurt fed through to the Irish market and gilt prices reached record levels with the yields on the benchmark 2001, 2008 and 2015 stocks all hitting new highs.
The Irish stock market soared over three per cent to a record closing high of 4190.59 while the financial index - dominated by the two big banks - gained over five per cent. Allied Irish Banks and Bank of Ireland rose dramatically in heavy turnover and at the close AIB was up 54p on 732p while Bank of Ireland was 60p higher on £11.50.
Yesterday's rise meant that AIB is the first Irish company to have a stock market value of over £6 billion while Bank of Ireland's stock market value is just under £5.9 billion at last night's closing price.
