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Market Comment
Will the ECB re-activate the SMP bond-buying programme?
30 July 2012
Conall Mac Coille
Spanish and Italian yields fell sharply on Friday as speculation continued to grow that official intervention in European bond markets is now likely. Spanish ten-year bond yields fell back to 6.8%, with Italian yields falling back below 6.0%. Equity markets joined in the rally with the Euro Stoxx 50 Pr up 2.2%, the FTSE 100 1.0% and the S&P500 up 1.9%.
Following ECB president Draghi's comments on Thursday that he was ready to take action to preserve the euro, a story in Le Monde on Friday indicated that a new plan for the EFSF to buy Italian and Spanish debt would be bolstered by a re-activation of the ECB's SMP programme. So the market will now clearly focus on any commentary ahead of this week's key ECB policy meeting on August 2nd.
Last week, the rally in peripheral European debt helped Ireland's re-entry to the bond markets. The bid-ask spread on the Irish nine-year bond yield is now between 6.2% and 5.8%. Over the weekend, NTMA chief John Corrigan indicated that Ireland requires further debt relief from Europe to lower the burden of its bank debt, and help drive the cost of borrowing down from the 5.9% offered on the 2017 bond last week.
So Ireland's reliance on Europe in respect of its funding costs is twofold. Markets are currently pricing in some additional support from Europe — at the very least, additional funding to help the government meet its €3.1bn obligation to pay down IBRC's promissory notes. However, efforts — or lack thereof — this week to address the European sovereign debt crisis could also have a large bearing on Ireland's ability to access private debt markets at sustainable yields.