Prices soared on the Government bond market in Dublin yesterday and, following an enthusiastic response to a new bond auction, the yield on Irish 10-year bonds narrowed to within 0.6 of a percentage point of German bonds. Irish bonds are now trading at a substantial premium to American and British 10-year bonds. The huge demand for Irish stock was due to a combination of factors. These included the auction of £250 million of the new 10-year bond, last week's near-record inflation figures, the positive outcome of the EU finance ministers meeting over the weekend and a big jump in American treasury bond prices as US inflation for August came in below market forecasts.
That US data also saw US stocks surge with the Dow Jones index of blue-chip companies climbing 174.78 points or 2.26 per cent on the day to close at 7895.92. The rise was the fourth largest in Dow history in point terms.
In Dublin, there was huge demand from market-makers for the £250 million of the new 2008 bond, but it is understood that one market-maker - thought to be NCB - picked up a substantial portion of the £250 million being auctioned. The fact that the gap between the highest and lowest accepted price was just 10p (one basis point in yield terms) indicates clearly that one buyer picked up the bulk of the auction.
NCB would not comment, but its decision to aggressively bid in the auction seems to have been fully justified, as the yield on the 10-year stock fell sharply from the 6.25 per cent at the auction to 6.12 per cent at the close of trading. Market-makers, who were left short of 10-year stock at the auction, had little option but to go into the secondary market and pay a higher price, said one source.
Dealers said that demand for stock was phenomenal yesterday and added that this demand was likely to continue with many of the market-makers now very short of the new 10-year stock.
The National Treasury Management Agency has a commitment to hold one auction a month. While not specifically committed to auctioning the new 10-year stock in October, market-makers believe the NTMA will be keen to build up the size of the new benchmark stock and will almost certainly auction the new 2008 gilt.
The auction of the new 10-year bond came at a most opportune time for the NTMA, with the decision of Ecofin to bring forward the EMU timetable, eliminating some of the uncertainty that had concerned investors in Irish bonds. "It looks like a one-way bet now," said one market-maker on Ireland's prospect for EMU, "and the new gilt is possibly the last chance to get a slug of Irish paper."
But the international environment is also benign for Irish bonds, with the August inflation figures in the US indicating that there is little reason to fear a rise in US interest rates. The 0.2 per cent rise in US consumer prices was well below the 0.3 per cent rise pencilled in by Wall Street forecasters.
Elsewhere on the bond market, prices soared and the yield on the long-dated gilt fell from 6.36 per cent to 6.27 per cent. At the short end, the yield on the 2001 short-dated stock fell from 5.44 per cent to 5.33 per cent.
On the money market, 12month rates fell further to 53/4 per cent while one-month rates also fell slightly to 61/8 per cent. The inverted rates on the money market indicates a clear belief among investors that interest rates are on the way down in the medium term, although market sources believe that the Central Bank is likely to act to try and prevent any early cut in retail bank lending and mortgage rates.
While there have been mutterings from some members of the Bundesbank council that rises in short-term rates may yet be required, most in the market do not see a rise in German rates as a likelihood in the short term, given the weakness in the German economy.
