Given the opacity of the sovereign bond markets - especially for countries like Ireland (note the farce here - Government own securities exist in a world of much more restricted newsflows than ordinary equities, and yet everyone today expects Governments to lead in a charge for greater transparency and regulation) - one finds it difficult to explain what has been happening here.
Two possible contributing factors emerged in recent days to at leats partially account for strong performance:
- ECB buying Irish bonds; and
- Short positions being rolled up in profit taking
FT Alphaville has a few charts on both Irish & Portuguese markets (here).
Which brings us to the shorts closures. Holding an open and backdated short position in the paper artificially propped up by the ECB is like taking a proverbial p**ss into the gale force wind storm. Given that most shorts against Irish debt were written around mid- to late-August, this was clearly the time to book some profits. Which, of course, further pushed up demand for these bonds and thus prices. Yields compressed down.
But the question next is: where does the freed up cash flow now? Most likely, the markets will pause to see whether the ECB latest purchasing is going to continue. If so, expect another rise in prices and a waiting game, as markets participants would rationally expect the ECB to start unwinding new purchases in a couple of weeks time. Once that move is seen on the horizon, new shorts will be taken, once again.