European central banks are reported to have bought Irish government bonds today, following a widening of spreads compared with benchmark German bunds.

The central banks are believed to have bought Irish debt with maturities no longer than two year.

Central Bank governor Patrick Honohan described Irish bond market spreads as a "setback," following  a triple whammy of three items of bad bank news over the past week 1) speculation that Allied Irish Banks (AIB) will not be able to raise sufficient private capital to avoid the Irish Government taking majority control of the economy's biggest bank 2) news from the European Commission that Irish Government support for the former nationalised  builders' bank will exceed  €24bn  - - 75% of current tax revenues; the funding of Anglo is over a number of years but nevertheless, it should not be a surprise that such a ratio should have potential to shock outsiders 3) Bank of Ireland on Wednesday reported a loss of  €1.25bn in H1 2010.

"The spreads are a setback for our hopes of a narrowing to reflect the fiscal credibility of the country," Prof. Honohan told the Daily Telegraph. "I don't look at them every day but at this level they are ridiculous."

Bond spreads on Wednesday hit the highest level in a month, reaching almost 300 basis points at one stage  and the yield on Irish 10-year bonds rose to 5.4% , while German 10-year bund yields fell to a record low.

The spreads closed just below 289 (2.89%) basis points, and today are just slightly lower at 286 basis points.

Bloomberg reports Irish two-year notes rose for the first time in six trading days, pushing the yield down three basis points to 3.2% as of 1:31 p.m. in London. The yield has crept higher from 2.38% on Aug. 4, the last time it posted a daily decline.

Dow Jones Newswires says the annual cost of insuring €10m of Irish debt rose around €12,000 on Thursday, hitting €282,000, up from around €200,000 at the start of the week. The cost of insuring a similar amount of bonds issued by Anglo Irish Bank and Allied Irish Banks PLC were both around €50,000 higher on the week at €532,000 and €425,000 respectively.

NCB Stockbrokers economist, Brian Devine, commented today: "The NTMA (National Treasury Management Agency) sold €500mn of the 14/2/2011 T-Bill at an average yield of 2.458% and a €500mn 18/4/2011 T-Bill at a weighted average yield at 2.810%. The bid-to-cover ratios were 3.6 and 3.1 respectively.

Ireland is paying a considerable premium over Germany currently for raising money. The spread over the euro Government curve for the 14/2/2011 is 169bps compared to 160bps for the Portuguese 02/18/2011 T-Bill. Both Ireland and Portugal have widened relative to Germany over the last week right across the curve, with Ireland widening by a larger amount to leave Ireland outside Portugal once again across most of the curve.

The 4.5% 04/20 Irish is now 286bps wider than the German 3% 04/20. In May, when Eurozone troubles were at their height the spread reached 305bps. Since then a €750bn euro/IMF contingency fund has been put in place and the ECB has entered the secondary market to buy periphery Government bonds. The ECB has slowed their bond purchases dramatically, but at the last ECB press conference Trichet stated that they were not done and they would do what was necessary to ensure a stable Eurozone economy, which of course he said was vital for “price stability”. Rumors were floating around yesterday that the ECB were buying Irish bonds.

The news surrounding the Irish banks is hardly news with Bank of Ireland results coming in largely in line with analysts’ expectations yesterday and an appreciation in the market that at least €24-25 bn will be injected into Anglo in total. The additional €1.4bn to bring the current projection for the total capital requirement to €24.354bn. As we stated yesterday, the sooner the Anglo issue is cleared up and clarity is given on the final capital requirement by the State, the sooner the focus can shift solely to the underlying state of the Governments finances and the commitment to reduce the deficit to below 3% by 2014. Nonetheless, we believe that the spread has gone too far relative where it was in May when Greece was in real danger of a liquidity crisis and there was a massive aversion to Euro assets in general."