Demand solid for Irish securities

IRELAND RAISED €1.5 billion yesterday in an auction of Government bonds which was 3.6 times over-subscribed, up from 3.4 times at the last auction in August.

However, while there was strong demand for the securities, the Government saw the cost of its borrowing rise significantly from one month earlier.

Two bonds were offered yesterday – € 500 million of the 4 per cent Treasury Bond 2014 was issued, with total bids exceeding the amount allocated by 5.1 per cent; while € 1 billion of the 4.5 per cent Treasury Bond 2018 was also issued, which was 2.9 times over-subscribed.

However, while demand was high, the yields achieved at the auction, or the interest rate paid to investors, was also high, with the eight-year bond issuing at an average yield of 6.023 per cent, compared to 5.088 per cent in June, and the four-year bond at an average yield of 4.767 per cent, compared with 3.627 in August.

Nonetheless, given the turmoil of recent weeks, the issue was well received. Oliver Whelan, director of funding and debt management at the NTMA, said it showed that, “investor demand has remained firm even in the current difficult market conditions”.

Taoiseach Brian Cowen also welcomed the outcome, saying the excess demand for the issue indicated there is “a lot of support obviously for the issuing of the bonds”.

For Ciarán O’Hagan, head of rates research with Société Générale in Paris, yesterday’s auction was “very strong”, given that the average price paid was 50 cent more for the 2018 bonds, and 31 cent more on 2014 bonds, than had been achieved in the secondary market prior to the auction. This indicated, he said, that investors were willing to pay a premium in order to buy the bonds in size.

Although, given the rising cost of funding, there may be a case for the NTMA to postpone its next two auctions which are due to take place in October and November, Willem Buiter, chief economist with Citigroup, suggested that Ireland has now become a victim of its routine. “If it doesn’t turn up it looks like it lost its nerve,” he said.

Moreover, Mr O’Hagan said that by committing to go ahead with such auctions, the Government is also “committing to liquidity”, which he deems vital, given what happened to Greece when it stopped issuing earlier this year and investors got scared off.

As for claims that Ireland may need to call on the European Financial Stability Facility (EFSF) sometime next year, Mr O’Hagan dismissed such speculation, given that Ireland is already pre-funded for half of 2011 while it can also draw on the National Pension Reserve Fund. “There is no way Ireland is going to get any money [from the EFSF] when it is so cash rich,” he said.

Across Europe’s peripheral markets, yields on 10-year bonds fell yesterday. On Monday, yields of Irish 10-year bonds had reached new highs since Ireland joined the euro, touching 6.5 per cent, but following yesterday’s auction the yield fell, dropping back to 6.37 per cent. This brought the spread, or difference between Irish and German bunds, down by 17 basis points to 384 points.

Fergus Murphy, chief executive of EBS Building Society said that this high spread is now “way overdone”. – (Additional reporting Bloomberg)