Improved sentiment helps lower bond yields

The positive newsflow around the Irish sovereign has helped bond yields trade well below Spanish debt, even though Ireland is in an EU/IMF bailout programme.

Irish 10-year bonds were trading at 4.47% yesterday, compared with 5.9% for 10-year Spanish bonds. There was a spike in Spanish yields following the news that its central bank said bad debts had risen to 10.7% of total loans.

It was reported over the weekend that US investment firm Franklin Templeton had increased its holding of Irish sovereign debt to over 10% of all outstanding longer-dated bonds. Moreover, the ratings agency Fitch said yesterday it had upgraded its outlook on Irish banks from negative to stable.

Market sources say Franklin Templeton passed the 10% level some weeks ago and could be adding further to its holdings.

“In terms of the next catalyst for Ireland, we have argued recently that improving sentiment and well-received new issuance such as what we have been seeing of late could lead to a ‘virtuous circle’ for the sovereign,” said NCB economist Philip O’Sullivan.

“At present, Moody’s is the only one of the ratings agencies to rate Ireland as sub-investment grade, and if this progress can help nudge Moody’s more cheerful disposition towards Ireland of late into returning the country to an investment grade rating, this would be a key positive.”

Last week, Bank of Ireland raised €1bn through an unguaranteed covered bond at 3.1%. It was two and a half times oversubscribed. There are now reports that AIB will follow suit and issue an unguaranteed covered bond. It is thought the bank has not yet appointed advisers, although AIB was unavailable for comment.

Issuing covered bonds is a more expensive form of funding than the ECB, but it is an important step for the banks to get back to independence.

According to a source close to the NTMA, it is unlikely that the Government will tap the markets again before Christmas.

The prospects of making a full market recovery depends on whether the Government can secure a deal on Irish bank debt and whether Irish banks need further recapitalisation.

The Jun 29 EU Summit appeared to broker an agreement on breaking the vicious cycle between the sovereign and bank debt. A significant amount of investment flowed into Irish bonds over the summer in expectation of a deal.

The next €3.1bn promissory note payment is due in March.