Aug

26

irish dancersYesterday S&P cut Irish debt ratings and their yields blew out relative to other sovereign bonds. Today, an Irish debt auction was TEN TIMES oversubscribed at yields that were 48 basis points lower than an auction just two weeks ago. The Irish Finance Minister should buy the S&P analyst a pint of Guiness!

From Bloomberg:

The Dublin-based National Treasury Management Agency sold 200 million euros of securities due Feb. 14, 2011, at an average yield of 1.978 percent, 48 basis points lower than at an Aug. 12 sale. It also sold 400 million euros of April 18, 2011, debt at an average yield of 2.348 percent, down 46 basis points. Both securities were oversubscribed. Irish bond yields soared yesterday after S&P cut the country's rating to AA- amid concern that the rising cost of supporting banks will swell the budget deficit. S&P increased its estimate for recapitalizing the banking system to as much as 50 billion euros from 35 billion euros previously. While the government has spent almost two years on an austerity drive totrim the country's deficit, the cost of supporting Anglo Irish Bank Corp. has undermined sentiment. "The very high bid-to-cover ratios and lower borrowing costs are eye-catching," said David Schnautz, a fixed-income strategist at Commerzbank AG in London. "It suggests some investors do see value in Irish securities after the recent sell-off. What I find encouraging is that the NTMA decided to stick to the amount it planned to sell even though they could have issued more given the strong demand." Investor Bids Investors bid for 10.1 times the Feb. 2011 securities and4.1 times the April 2011 debt. That compares with 3.6 times and 3.1 times at the Aug. 12 sale, respectively.

John Floyd writes:

Clearly the rating agencies are not at the forefront of forecasting and there may be some short term consolidation or decrease in yield spreads in the short term. However let us put this in proper context and look at the increase in yield spreads recently and take into account these auctions are being bought/funded by the ECB indirectly.

And in the medium to long term the ways out for Ireland and others in Europe is becoming a very narrow street that is leading with increasing probability to default/restructuring scenarios and much wider spreads.
 


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