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Bond Markets

Government borrowing costs take yet another spike

As the government announces massive budget adjustments, the cost of Irish borrowing lies just off its all-time peak.

THE COST OF BORROWING for the Irish government has rocketed this afternoon as the world’s markets got to grips with the immense level of budget adjustments required by the government to meet the EU’s 2014 target for cutting the budget deficit to 3% of GDP.

The annual yield (essentially the interest rate) of ten-year bonds being traded second-hand on world markets rose by almost a third of a percentage point, rising from 6.436% this morning to 6.767% when trading closed at 4pm – jump of 33 ‘basis points’.

The actual bid price for bonds, as opposed to the transaction price, nudged above 6.9% – the highest they had been in over a month, when the cost of borrowing peaked before the government announced the final cost of the bank recapitalisation.

The rise in the cost left the spread between Irish and German ten-year bonds at 412bps, the largest it had been since the spike of a month ago.

Today’s closing price is the second-highest closing price Irish bonds have registered since Ireland joined the Euro; the higher price was achieved on September 29, when they closed at 6.79%.

Shorter-term bonds also became more expensive – two-year bonds were up 10 bps to 3.685%; four-year bonds were up 31 bps to 4.908%, six-year bonds rose 34 bps to 5.625%, while eight-year paper picked up 32 bps to finish at 6.253%.

It was a poor day for other weaker European economies too; Greek ten-year bonds picked up 68 bps – over two-thirds of a percentage point – to close at 10.348%, a relative gain of over 7%, while Portuguese ten-year bonds rose 21 bps to 5.851%.