Irish bond yields rise on election, Brexit fears

LONDON: Irish bond yields rose on Tuesday, with the gap to French peers hitting its widest in eight months, on uncertainty about the outcome of Friday's election and how Britain's referendum on its membership of the European Union will play out.

With yields across the euro zone broadly stable, the move in Ireland stood out, with 10-year yields rising as much as 7 basis points to a one-week high of 1.07 percent.

Ireland's governing parties remain unlikely to win a majority in Friday's parliamentary election, a poll showed on Tuesday, highlighting the risk of political stalemate.

Meanwhile, news at the weekend that Britain will hold a referendum in June on its continued membership of the EU has raised concerns over how a "Brexit" could affect Ireland.

The United Kingdom is one of its most important trading partners.

"If there was a Brexit, the general view is that it would be negative and this would definitely hit Ireland," said Daniel Lenz, a strategist at DZ Bank.

"The closer the referendum gets, the bigger the scope for spread widening."

A remarkable economic recovery following a bailout in 2010 has helped push Irish bond yields closer to their French counterparts in recent years, but that gap has widened since the start of the year amid heightened political risk.

The yield gap between Irish and French 10-year bonds was at 51 basis points on Tuesday. That's up fivefold from levels in January which were the narrowest since 2008, when the global financial crunch that started with the Lehman Brothers collapse morphed into a euro zone sovereign debt crisis.

National elections present the most immediate risk for investors in Irish debt, yet the prospect of Brexit has risen this week after popular London Mayor Boris Johnson swung behind the leave campaign.

Over the last two trading days, the pound has shed 1.5 percent against the euro, and with further weakening expected if Britain actually decides to leave, analysts say it is an unwelcome development for Irish exporters.

"Given the significant economic linkages between the UK and Ireland, it will become a larger issue for Ireland," said Ryan McGrath, an analyst at Cantor Fitzgerald in Dublin.

"The UK is the second-largest export destination for Irish goods exports, behind the US" German 10-year yields -- the bloc's benchmark - were flat on the day at 0.18 percent. All other euro zone yields were broadly unchanged, apart from Ireland's which closed up 3 bps at 1.02 percent.