Last updated: November 10, 2010 4:26 pm

Irish bond yields surge to record

The eurozone’s debt problems resurfaced on Wednesday as worries over Portugal and Ireland intensified.

Irish 10-year bond yields surged 61 basis points to 8.7 per cent – a record since the launch of the euro and a level considered unsustainable by most analysts. The spread over benchmark German Bunds widened to 615 basis points, also a record.

Portuguese bond yields jumped to 6.80 per cent – also a fresh high since the launch of the euro. The Lisbon government has warned that yields above 7 per cent would put big strains on the economy.

Fresh concerns arose after moves by LCH.Clearnet, the London clearing house, to make it more expensive to trade Irish debt because of concerns that Dublin will have to restructure its bonds, and following a Portuguese debt auction.

Although Portugal comfortably raised €1.242bn in six-year and 10-year bonds, the high yields demanded by investors sparked concerns in the markets.

LCH.Clearnet, the world’s second largest fixed income clearing house, said an additional margin requirement of 15 per cent would be charged on investors’ net exposure to Irish bonds because of the increasing risk of a sovereign default.

In essence, this means that any bank or institution using Irish bonds as collateral for cash will have to pay a larger fee to do so.

The London-based clearing house said margin required for positions of Irish government bonds would be increased by 15 per cent of net exposure, under new rules that help it indemnify against default risk.

It added that the rules would also apply to Irish government bond exposures in the single-A euro general collateral basket.

The additional margin will be charged on net exposure at close of business on Thursday November 11 and reflected in a margin call on Friday November 12.

“LCH.Clearnet will continue to monitor the situation closely and keep the parameters under close review,” the clearing house said.

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