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Ireland's borrowing costs jumped at a bond auction on Tuesday but appetite for its debt, and for separate Spanish and Greek treasury bill sales, was robust enough to lift their bond markets. Despite Ireland's tough austerity measures investors are demanding higher yields on its bonds because of concern about how much it might cost to bail out its banks and the toll that economic troubles could take on tax revenues.
Still, Dublin attracted enough demand for an offer of 1.5 billion euros of four- and eight-year bonds to lift the euro and compress the premium investors demand to hold Irish debt rather than German Bunds. The yield on the four-year bond fell almost 20 basis points on secondary markets compared to the previous session. Like Spain earlier this year, Ireland has had recently to deny rumours that it was on the verge of asking for a bailout from the International Monetary Fund or elsewhere.
This has caused Irish debt to perform less well than some others in the eurozone periphery and meant markets had been expecting a rise in average yields at the auction compared to previous tenders. Ireland placed 500 million euros of four-year bonds with an average yield of 4.77 percent, up from 3.63 percent in the previous auction in August. The average yield on the eight-year bond rose to 6.02 percent from 5.09 percent in June. But the spread between Irish 10-year government bond yields and German Bunds fell to 402 basis points from the euro lifetime high of 425 basis points set on Monday. The cost of insuring Irish debt against default also fell
Ireland's debt agency said after the auction it hopes yields have peaked and that it will stick to its auction schedule for the rest of the year, with ranges of 1 billion to 1.5 billion euros at each. While Ireland's auction was the main focal point for many investors, good demand at Greek and Spanish sales also helped support eurozone peripheral debt markets.
Greece, where eurozone sovereign credit concern originated last year, saw the average yield on the 13-week treasury bills it offered fall to 3.98 percent from 4.05 percent in a previous sale in July. Foreign investors snapped up nearly three quarters of the 390 million euros worth of paper that was sold by Greece, which is barely holding on to its investment grade rating from Fitch as it battles to cut a steep deficit and emerge from recession.
Spanish government bond spreads over Bunds also narrowed, hitting 172 basis points, its tightest in a week. Spain continues to differentiate itself from other countries on the eurozone periphery, as its spread is much tighter than Ireland's, Portugal's or Greece's.
After investor jitters in May and June inflated Spain's cost of borrowing, yields have moderated somewhat as the country adopted austerity measures and labour market reforms.

Copyright Reuters, 2010

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