Irish bonds delivering best returns in world
Irish securities handed investors a 14% gain in the past three months, the highest among 26 government debt markets, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
The nation’s 10-year yield is at more than two percentage points below its three-month average, the biggest recovery among the countries that received aid. Greek yields are 1.13 percentage points higher than their average since May 23, while those of Portugal are 2 basis points above their mean.
“My perception is, and always has been, that the situation in Ireland is more manageable than in all the other tricky countries,” said Kornelius Purps, a strategist at UniCredit SpA in Munich. “The economy has growth potential while the other economies don’t. That’s one of the biggest problems for Greece and Portugal.”
Bondholders are betting the Irish economy will extend an export-led recovery that propelled it in the first quarter to the fastest growth rate in more than three years. The economy will probably expand by 0.5% this year, while the Portuguese and Greek economies contract by at least 1.9%, Bloomberg surveys of economists show.
Taoiseach Enda Kenny obtained a cut on the country’s bailout interest rate last month while retaining the right not to raise the 12.5% tax rate it charges companies.
Irish 10-year yields slipped below 10% this month for the first time since Portugal’s April rescue. The Greek 10-year yield, which reached a record 18.39% in July, hasn’t been in single digits since October, while Portugal’s 10-year borrowing cost has stayed at 10% or above since June.
The profit investors have made on Irish bonds compares with losses of 2.2% on Portuguese securities and 1.5% on Greek debt, according to the EFFAS indexes. German bonds gained 6.1% in the three months.
Ireland’s funding costs are also declining relative to those of Germany, the euro area’s largest economy, defying a surge in Greece’s. Greek two-year notes yield the most relative to German counterparts since at least 1998 at 40 percentage points today, while the Irish spread has shrunk to 8.33 percentage points from a euro-era record of 22 percentage points in July.
European leaders sought stop a region-wide sell-off in bonds by agreeing at a summit on July 21 to extend the maturities of Greece’s existing bailout loans and provide financing at rates close to the cost paid by the European Financial Stability Facility of about 3.5%, adding that those conditions would also apply to Ireland. Ireland had been originally saddled with an average 5.8% rate.
The new deal will save Ireland €1 billion or more next year if the cut is extended to other loans, Finance Minister Michael Noonan said on July 22.
Ireland resisted attempts led by French President Nicolas Sarkozy to force it to raise its corporate tax rate which, at about half the EU average, has lured companies such as Hewlett-Packard and Pfizer. That’s helping fuel optimism that it will resume growth that doubled the size of the economy in the decade through 2007.
