The key level of 8 per cent has been rapidly passed today by rising Irish ten-year bond yields. London clearing house LCH.Clearnet has now moved to protect itself from any possible restructure, by making it more expensive to trade Irish debt.
LCH.Clearnet, the world’s second largest fixed income clearing house, said an additional 15 per cent margin requirement would be charged on investors’ net exposure to Irish bonds because of the increasing risk of a sovereign default. It’s another blow, following news that some SWFs were divesting Irish and Portuguese debt. The ECB is apparently buying Irish debt yet again.
Tension rose today following a Portuguese debt auction. Lisbon did sell €686m 10-year bonds and €556m 6-year bonds, less than the guideline range, which was €750-1250m in both cases. (Selling less than the guideline amount has been a feature of Portuguese debt auctions since July.)
Yields, however, were punitive. Lisbon will pay 6.81 per cent on its 10-year debt, up more than half a point since the last auction of comparable debt in September – and up 1.5 percentage points on the August auction. The cost of debt on the 6-year bond has risen almost 2 percentage points since the last auction in August, now standing at 6.16 per cent. Yesterday, the Greek cost of debt for short-term debt – just six month bonds – rose 25bp to 4.82 per cent.
Yields at auction matter more than secondary market goings-on because they tell us the actual cost of debt to the government in question. Nonetheless, it is significant that Irish resale yields have passed 8 per cent: this is one suggested lending rate for the European Financial Stability Fund. Thus if Ireland needed to raise funds today, it would probably be cheaper to approach the fund than the markets (excluding reputational impact).
Ireland does not need to raise funds today, as far as we know. Mid-2011 is the next slated date, raising some to question why the markets are being quite so hostile. Yields in the secondary – resale – market may well fall before then.