DESPITE YESTERDAYS “horrendous” announcements, markets reacted positively, at least in the short term, to the news that the Government will likely take majority control of AIB and that the total costs of the banking bailout could reach € 50 billion.
Bond yields fell back slightly and AIB shares regained most of their losses on the day.
Having reached an all-time high of almost 7 per cent this week, the yield on Irish 10-year bonds fell back by 14 basis points yesterday to 6.56 per cent, while the spread, or difference, over German bonds also came in – albeit marginally – by 18 points at 4.29 per cent. Credit-default swaps, which insure against Irish government debt default, also fell, down by 19 basis points to 451.5, the lowest level in more than a week.
On the equity side, the Iseq rallied after sharp falls in morning trade, with the Irish index finishing up 19 points at 2,676. Having tumbled by 28 per cent at one stage to hit 37 cent, AIB regained ground to finish just over 8 per cent down at 50.7 cent.
Bank of Ireland climbed steadily throughout the day, closing up 8.8 per cent at 62 cent after the Minister for Finance said it would need no further State funding.
Bloxham’s Ian Huggard said that while the market response was a vote of confidence in the Government’s statement on the debt level it is facing, investors would be focusing on the detail in the coming days.
“The market is giving the Government the benefit of the doubt about the cost; now they have to show how they will do it.”
In terms of the bond markets Padhraic Garvey, a fixed-income strategist at ING Group in Amsterdam, said that the market reaction had been positive, noting that yields “could have gone the other way”.
Brian Devine, economist with NCB Stockbrokers, agreed, asserting that the reaction was “fairly positive” and that the announcements have “drawn a line under the financial sector”.
However, bond yields remain elevated, with the cost of Irish Government funding still three times more than that of Germany, leading the National Treasury Management Agency to pull its remaining two bond auctions of the year, which were due to take place in October and November.
Minister for Finance Brian Lenihan said that these would not now take place, “because the interest rates are so high”.
While market commentators had feared that any change in the agency’s bond auction schedule could be problematic, leading to even poorer market sentiment and a reduction in liquidity, yesterday’s cancellation announcement was met with equanimity.
For Mr Garvey, the decision to cancel the auctions “makes perfect sense”.
Ireland is fully funded until June 2011, but Mr Garvey nonetheless expects the agency to be back in the market in either January or February.
