Irish, Portuguese Bond Trouble Hits Broader Corporate Market

The ongoing financial drama in Ireland nd Portugal is now affecting the broader corporate CDS market, according to Markit Financial Information Service.  A swarm of rumors kicked the Irish CDS spread up 19 basis points, to 590, and a failed bond auction raised the price of Portuguese sovereign Credit-default Swaps by substantial 27 points.

“The auction results were hardly a rousing endorsement of the country’s creditworthiness.”

Gavan Nolan

The Portuguese government managed to sell the expected amount of bonds, about 1,2 billion euro. However, at a significant higher yield than at the last auction, and with a substantial lower bi-to-cover ratio. The auction was, at least partly, a failure.

“The sovereign rumour mill was in full swing today, sending spreads wider and affecting the broader corporate market. The picture looked different this morning, with sovereigns outperforming corporates,” credit analyst Gavan Nolan writes in Wednesday’s Intraday Alert.

Yesterday’s short covering  (the ECB was active in the government bond market) continued today ahead of Portugal’s keenly anticipated bond auction.

“Recent volatility made the Iberian country’s debt sale more problematic than usual, even if the relatively small size precluded an outright failure,” Gavan Nolan comments.

As expected, the sovereign managed to sell an amount (EUR1.242 billion) close to the top of its indicative range.

“But the auction results were hardly a rousing endorsement of the country’s creditworthiness,” Nolan notes.

The yield on the 6-year bond was 6.156%, up significantly from the 4.371% at the last auction on August 25.

The bid-to-cover ratio was 2.3, more or less in line with the 2.1 at the previous auction.

However, the b/c on the 10-year bond was only 2.1, down sharply from the 4.9 at the previous auction in September 22.

The average yield was an expensive 6.806%.

Portugal’s CDS weakened slightly post-auction, but closed at 480, up 27 bp’s since yesterday.

Don’t Mention The Fund!

But there was worse to come in the afternoon as a slew of rumours, most of them centred around Ireland, sent spreads even wider:

Irish central bank governor Patrick Honohan made a statement saying that the government is putting a fiscal package in place of the sort that the “IMF would want to see”.

“On the face of it Honohan’s statement is uncontroversial; the IMF’s enthusiasm for austerity is well-established. But putting Ireland and the IMF in the same sentence can trigger palpitations in the credit markets – witness the reaction to the Irish Independent article published the weekend before last,” the credit analyst at Markit points out.

So, the rumor that the Irish government and the IMF have already reached an agreement sparked another jump in Irish borrowing costs, with the sovereign CDS spread widening by almost 20 bp’s.

However, this seems improbable given the impending budget vote on December 7, Markit says.

“Though it certainly can’t be ruled out when Ireland’s funding needs are more pressing,” Gavan Nolan adds.

“The government’s precarious position has no doubt contributed to the recent widening, and even if the budget is passed talk of an early general election is unlikely to subside given the by-elections next year.”

Still, there was more to come:

LCH Clearnet increased its margins on Irish government bonds by 15%, another sign of the increased riskiness of the sovereign’s debt. And the government’s guarantee of Irish banks’ senior debt was extended until June 2011.

“The state’s exposure to the country’s failed banking sector lies at the heart of its current credit malaise, and the extension highlighted that it is unlikely to get better anytime soon,” Nolan at Markit Credit Research concludes.

  • Markit iTraxx Europe 103bp (+3.5), Markit iTraxx Crossover 453bp (+16)
  • Markit iTraxx SovX Western Europe 176bp (+2.5)
  • Markit iTraxx Senior Financials 144bp (+7)
  • Markit CDX IG 91.5bp (+1)
  • Sovereigns – Greece 875bp (+11), Spain 278bp (+13), Portugal 480bp (+27), Italy 200bp (+3), Ireland 590bp (+19), Belgium 142bp (+2)


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