An auction of government bonds in Ireland this morning will provide a crucial test of investors' appetite for Irish debt amid growing fears of a default.

The National Treasury Management Agency in Dublin is expected to raise up to €1.5bn (£1.2bn), a day after 10-year government bonds hit a a new record high amid fresh worries over Ireland's economic recovery. The Irish central bank warned on Monday that even tougher action on public spending may be required to win back investor confidence and cut interest payments on national debt.

The agency is offering between €1bn and €1.5bn of four and eight-year bonds. The auction results will be announced after 10am.

Markets are expecting solid demand as bond yields are high. Investors are demanding high premiums to buy Irish debt due to growing concerns about the escalating cost of the government's bailout of Ireland's stricken banking sector.

The cost of rescuing the nationalised Anglo Irish Bank, which recently reported the biggest corporate loss in Irish history, is set to push Ireland's budget deficit to 25% of GDP this year. The government insists it can slash this to 3%, as required under EU rules, by 2014.

The premium paid for Irish 10-year debt over the German bund equivalent rose to a record yesterday, with the spread exceeding 400 basis points. Irish finance minister Brian Lenihan said he was "concerned" about the jump.

The yield on 10-year bonds hit 6.5% at one stage yesterday before falling back to 6.48%. The rate moved up again this morning, to 6.6%.

Contracts insuring against an Irish debt default rose to a record 450 basis points yesterday from 421.



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