Banking Crisis Part 2

Irish bond spreads widened today and yields inched above 6 per cent, rising above the peaks reached at the height of the sovereign debt crisis in early May.

The spread between the benchmark 10-year bond and the German bund was 372 basis points this afternoon, while the yield earlier rose sharply, by over 30 points, to a new euro lifetime high of 6.011 per cent at one stage, before falling back to 5.98 per cent at 5pm.

This compares with a yield of 5.68 per cent a week ago and is now almost three times higher than equivalent German bonds, the lowest yielding bonds in the euro zone.

Analysts said the jump in Irish bonds appeared to be an over-reaction but such an extreme move puts further pressure on Minister for Finance Brian Lenihan and the European Commission to put a final price on Anglo's bailout and its future.

The increase in Irish borrowing costs will also make it more costly for Irish banks to refinance billions of euros in debt this month.

Although the National Treasury Management Agency is holding an auction for between €400 million and €600 million of Treasury bills on Thursday, the Government’s own funding needs for this year have largely been secured in a series of monthly auctions giving Mr Lenihan at least some breathing space while he negotiates with Brussels.

Taoiseach Brian Cowen insisted today the economic situation was not out of control. "It is clear that we have to deal with the situation, which we believe is manageable," he told reporters in Dublin. "There has been turbulence generally in the international bond markets for some time and you have seen ebbs and flows in terms of sentiment."

Mr Lenihan is currently in Brussels, meeting with his EU counterparts. He met EU competition commissioner Joaquín Almunia yesterday to discuss the future of Anglo Irish Bank.

Bond yields have risen considerably in the past few months, fuelled in part by investor concerns and downgrades by ratings agencies.

This afternoon, the Portuguese-German spread reached 355 basis points, also a record, from 333 basis points. The Greek-German 10-year yield spread reached 947 basis points.

Concern some European nations are struggling to narrow their deficits sent the German bund yield to a record low and widened the spreads for the bonds of the most-indebted nations soaring.

The Greek-German spread reached a record 973 basis points on May 7th, the day before the European Union and International Monetary Fund crafted a region-wide bailout package to ward off investors betting on the break-up of the euro.