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The cost of government ten-year borrowing crept up all day, closing at 6.53% - compared to 6.001% on Tuesday.
Bond Markets

Uh-oh: two days after reining in, bond yields explode again

The cost of government ten-year borrowing was under 6% on Tuesday. Today it closed above 6.5% again.

THE COST OF borrowing for the Irish government has rocketed again in the last two days, jumping by more than 0.5% in a mere two days as international investors become increasingly shaky about the prospect of the government’s four-year budgetary strategy.

Having fallen below 6% earlier in the week – with global markets feeling positive about the government’s move to forge political stability as the opposition finance ministers were given a chance to examine the country’s finances – the annual yield of 10-year bonds had surged back to 6.53% as of 4pm this afternoon.

The remarkable turnaround came as investors reacted dimly to the Economic and Social Research Institute’s quarterly economic report, in which it anticipated that government attempts to meet EU budget deficit targets within four years could lead to a “lost decade” for the national economy.

The surge in the price of borrowing blew the spread between Irish and German ten-year bonds back above 4%, to 405bps – compared to 362bps towards the close of trading on Monday.

Portuguese and Greek 10-year paper also had poor days, with Portugal up 14 bps to finish at 5.876%, and Greece up 22bps to close at 9.271%. Both countries had also seen the cost of borrowing fall earlier in the week.

The EU rules on member states’ budgeting demand that a budget deficit be within 3% of a country’s GDP – something which the ambitious plan by the Irish government, hamstrung by the €50bn cost of the banking bailout, would not see realised until 2014.

But even trying to rein in the budgetary deficit over four years, the ESRI said, would hinder economic growth and lead to long-term unemployment that undid any of the good work of budgetary growth.

Ireland earlier ruled out the prospect of asking the European Commission for an extension on the 2014 deadline for meeting the deficit limit, while the European Commission said it was up to the Council of EU finance ministers to change those rules.

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