The sovereign bond market’s underperformance seen over the past week was extended Thursday, with the Markit SovX Western Europe index coming close to touching the record wides of 170bp reached in May. Ireland was again the catalyst: its spreads hitting 600bp for the first time amid heightened political risk. Finance Minister Brian Lenihan announced the scale and timing of budget cuts this afternoon, and the front loading of the cuts is aimed at appeasing the markets.
“It will raise questions on the effect of even more austerity on a country suffering from private sector deleveraging.”
The Markit SovX Western Europe index came close to touching the record wide of 170bp reached in May. Ireland was again the catalyst, with its CDS spreads hitting 600bp for the first time amid heightened political risk.
Amongst the influential factors, can be mentioned:
- A high court ruling that described an 18-month delay as “unreasonable” has forced the government to hold a by-election later this month.
- The ruling Fianna Fail party are expected to lose the seat, trimming the government’s already slender majority.
- The budget vote is to be held on December 7, and a defeat would trigger calls for a general election.
- Further by-elections next year make this an even stronger possibility.
“Finance Minister Brian Lenihan announced the scale and timing of budget cuts this afternoon, and the front loading of the cuts is aimed at appeasing the markets. But it will raise questions on the effect of even more austerity on a country suffering from private sector deleveraging,” credit analyst Gavan Nolan point out in the Thursday’s Intraday Alert
But Ireland’s predicament had negligible impact beyond the sovereign market. The vast majority of the corporate market tightened as QE bathed the credit world in positive sentiment.
Unsurprisingly, cyclical sectors such as commodities were among the strongest performers. But BHP Billiton’s spread tightening today was driven by news out of Canada, not the US.
“BHP’s spreads widened sharply when the deal was first mooted in August and many bondholders will be relieved if it doesn’t go through,” Nolan writes.
Yesterday’s quantitative easing announcement acted as a boon to risky assets today as investors welcomed the liquidity injection.
The FED says it would purchase an additional $600 billion of securities over the next eight months and left the door open for further action if warranted by economic conditions.
Given that monetary easing was priced in by the markets the FED had little choice but to deliver.
“Nonetheless, confirmation of the Fed’s commitment to supporting the economy has created positive sentiment, at least in the financial markets. The Bank of Japan could well follow suit in the next few days; it has already taken the radical step of starting a QE programme. Jean-Claude Trichet‘s non-event of a press conference this afternoon did little to alter expectations that the ECB is unlikely to shift its hawkish stance. The Bank of England is certainly more dovish, but the recent strong economic data no doubt stayed its hand this month,” Mr. Nolan at Markit concludes.
- Ireland targets 6 bln euros debt cut in 2011 (reuters.com)
- Another Day, Another Record (online.wsj.com)
- Trichet: 15 billion euros Irish cuts should be enough (reuters.com)
- Ireland slashes budget by £5bn as fears of Greek-style bailout grow (guardian.co.uk)