Peripheral bonds back in vogue after Irish sale

Wednesday 15 January 2014 17.23
eurocoin

Decent yields – along with the ECB’s pledge to do whatever it takes to protect the euro – have made Irish bond attractive to investors once more

By Economics Correspondent Sean Whelan

The NTMA sells €3.75 billion worth of ten year bonds, and suddenly they are all at it!

Spain is to offer €242 billion worth of bonds to the market this year – Italy will seek to borrow €470 billion.  Both countries’ ten year bonds carry higher yields than Irish debt.

Of the bailout states, Portugal announced this week that it would “tap” an existing bond to raise €5 billion.

It’s the kind of ‘first step towards returning to the market’ seen in Ireland 18 months ago, and comes ahead of Portugal’s planned exit from its bailout programme in June.

There is even the beginning of a debate on whether Portugal will go for a “clean break” from the troika, Irish style, rather than looking for a precautionary credit line.

Greece is also reported to be looking at a five year bond issue, after its ten year bond yield went below 8% for the first time in four years – again in the wake of the Irish bond sale.

The NTMA’s sale does seem to have set off a feel-good effect across the European bond market.

Bank of Ireland jumped on the bandwagon too, raising €750 million in an unsecured issue on Wednesday, mostly from non-Irish investors.

But can it last?

Certainly there has been a change in investor sentiment towards euro zone peripheral states, with bond buyers no longer regarding them as high risk (apart from Greece).

That’s mostly due to Mario Draghi’s pledge to do whatever it takes to keep the single currency intact.

With most peripheral Euro bonds now seen as safe, the higher yielding ones are in demand – precisely because they are higher yielding than say US or German bonds.

If you think the Irish are more or less as likely to pay you back as the Germans, why not take the extra 150 basis points on offer?

The need for yield is pushing more and more investors in the direction of Euro peripheral debt, and of that block, Irish debt is definitely flavour of the month, thanks in great part to actually completing the bailout programme and at the same time seeing some (but by no means enough) economic growth and jobs.

Although Irish debt is now in demand, the supply is rather tight.

Tuesday’s sale attracted orders of more than €14 billion, chasing an initial €3 billion of paper.  The NTMA has told the market it would only seek €6-10 billion this year – that’s now come back to €8 billion (and probably a bit less) in the wake of the sale.

The NTMA boss, John Corrigan, now plans to have a series of auctions for the remaining amounts of debt later in the year – to establish a regular pattern of bond sales, the final step in “normalisation”.

Although the fundraising requirements are relatively light this year (prefunding 2015 bond redemptions), that’s not the case later with a big bond redemption due in 2016, with €10 billion in ordinary bonds and €2.7 billion in Troika money due to be repaid (compared with €3.6 billion in 2015).

The NTMA plan is to work on a series of buybacks and maturity extensions to reduce that particular debt mountain well ahead of time, in the way this year’s peak was whittled down.

Now is definitely a good time to move and capitalise on a calm market, strong investor sentiment, and lots of cash looking for yield.  But these are not normal conditions.

And the proof of that is that Ireland – with a junk bond rating from Moody’s  (and triple B from the others) and a debt ratio north of 122% of GDP – can get a new ten year bond issue away at a yield lower than anything it could achieve when it had a triple A rating and a debt ratio at half the Maastrict limit.

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