Bond Markets Turn On Smaller Non-Core Euro-Zone Sovereigns
By Mark Brown
Of DOW JONES NEWSWIRES
LONDON (Dow Jones)--The premium that bond investors demand to hold Irish, Greek and Portuguese sovereign debt rose significantly Thursday, as country-specific concerns mingled with broader worries about the impact of austerity and the possible withdrawal of the European Central Bank's "non-standard" monetary stimulus programs.
The yield spread between Irish 10-year government bonds and the benchmark German 10-year bund hit an all-time high of over 520 basis points, having moved above 500 basis points for the first time earlier this week.
Portugal's 10-year spread against the bund rose 33 basis points to over 419.3 basis points, and Greece's increased 37.6 basis points to 880.2 basis points.
Irish, Portuguese and Greek 10-year government bonds were yielding 7.821%, 6.712%, and 11.376% respectively at 1710 GMT Thursday, up from 7.601%, 6.410%, and 11.022% 24 hours earlier.
Credit default swaps--a form of insurance against default--written on all three countries' sovereign debt also rose, in Ireland's case to a record 600 basis points at one point Thursday afternoon.
"The overarching theme that there has been on these countries is worries about the impact of budget cuts, combined with the ECB heading for the exit," said Marc Ostwald, currency and fixed-income strategist at Monument Securities in London.
ECB President Jean-Claude Trichet said Thursday that the central bank's remaining non-standard programs are "temporary in nature."
Also, Russia's two sovereign wealth funds will stop buying Spanish or Irish assets, according to documents posted on the Finance Ministry's website Wednesday.
According to ministry data, Russia's National Welfare Fund had assets of $89.54 billion at the start of October, while the Reserve Fund had assets of $41.39 billion, a combined sum equivalent to more than a quarter of Russia's official reserves.
"With the ECB stressing that it could exit its non-standard measures, and the Russian wealth funds saying some of these countries are not on their purchase list, things don't look great," Ostwald said.
The current strength of the euro--which has seen the currency notch up gains of some 16% against the dollar from a four-year low in June, to trade at around $1.4218 Thursday--won't help euro-zone peripheral countries increase exports, and recent services purchasing managers indexes already indicate that the recovery in those countries is proceeding more slowly than in "core Europe."
"It's a complex situation and the [spread] moves might be overblown but there are reasons to be doubtful," Ostwald said.
Peripheral euro-zone sovereign bond markets have been unsettled all week, since European leaders agreed late last week to create a permanent mechanism for confronting a fiscal crisis in the euro zone.
"The debate around changes to the treaty and the continued pressure on spreads make it more likely at the margin that someone has to go to the [the European Financial Stability Fund] for funding," said Paul Robson, a senior foreign-exchange strategist at the Royal Bank of Scotland in London.
Country-specific factors have also driven bond and CDS spreads higher.
Ireland has suffered as its coalition government faces further difficulties maintaining the majority it needs to pass its 2011 budget in December. Thursday, the Irish government agreed to hold a by-election just two weeks before this key date.
The Irish government said it will make budget cuts of EUR6 billion in 2011--double what it said previously--as it struggles to bring its huge deficit under control.
Traders told Dow Jones Newswires this week that central banks had been buying Irish government debt, and Trichet said Thursday that the ECB's bond-buying program remains "in force," although as of Monday, ECB data showed that it hadn't settled any bond purchases for three weeks.
"Ireland is in a very different fiscal position to Greece, but the markets have looked at Ireland and said: 'This is unsustainable,'" said Simon Penn, market analyst at UBS AG.
Portuguese sovereign bonds may have come under more technical pressure, after Portugal announced that there would be an auction of EUR0.75 billion to EUR1.25 billion of six- and 10-year government bonds on Nov. 10. Portugal had to pay higher yields than previously Wednesday in its sale of just over EUR1 billion of three- and 12-month Treasury bills.
The Lisbon government has managed to approve its austerity budget, after long talks with the main opposition party,
However, while investors turn against smaller peripheral euro-zone sovereigns, larger countries are under less pressure. The Spanish Treasury's launch of a five-year bond went smoothly Thursday, for example.
"While Ireland and Portugal continue to suffer from negative investor sentiment, Spain has remained relatively well-insulated of late," Citigroup said in a note.
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