The market reaction to yesterday’s EU summit (release here) has been dramatic. We watched the recent alarming rise in the Irish two-year bond yields constructed by Bloomberg. This is largely based on the €12 billion bond we have maturing on the 15th of January 2014.
In the past fortnight these rose from 13% to 23% (though we did note that this was based on low volumes). In the days preceding the emergency EU summit the yields began to fall and were down to 19% at the close yesterday.
What has happened this morning?
The yields have been dropping like a stone! After opening just above 19%, the yields are now down to 14.5% – the price of Irish bonds has risen substantially in morning trades. This movement is undoubtedly welcome and the short term market outlook for the Irish economy is more stable but we won’t be popping the champagne just yet. The tw0-year bond yields are simply back to where they were a fortnight ago.
The movement in the key 10-year yield has been less dramatic. At its local maximum it reached over 14% on Monday and had fallen to 12.3% by the close yesterday. By half nine this morning it had fallen, but only to 11.8%. Yesterday’s summit has done little to change the long term view of the Irish economy.
The reduced interest rate means there will be more money in the kitty to pay the January 2014 bond. The yield on this has fallen. Our long term ability to return to markets has not improved and the 10-year yields remain prohibitively large and like the two-year yield are only back to where they were a fortnight ago.
We have probably got as much as a concession from Europe as we are going to get for the next 18 to 24 months. Getting our own house in order (i.e. having a lower deficit) can bring us much further.
The market reaction for Spain and Italy was not so positive. 10 year yields are up today, not by a lot, but clearly going in the wrong direction.
ReplyDeleteWhile the drop in bond yields is welcome, the problem is that we've been here before. At the time of the last big European push to solve the financial crisis, ie, the establishment of the EFSF and the other funds back in the early part of last year Ireland, Greece and the others all saw huge drops in their bond yields in the immediate aftermath of the news. However, once the market absorbed this huge effort, the bond yields started inching up again which forced Greece and then Ireland to seek loans from the EU and IMF. For this week's policies to have any success Irish, Greek, Portuguese, Spanish and Italian bond yields have to fall steadily over the next 1-2 years to about 5%. At this level each country can borrow sustainably from the markets without recourse to the EU or IMF. Only if this occurs can we applaud and acclaim this week's summit. Otherwise it will be yet another milestone on the road to perdition of the EMU.
ReplyDeleteSeamus:
ReplyDeleteSlightly off thread, but did the mooted 'bank transaction tax' make its way onto the Euro summit agreement?