Markets positive over Moody’s upgrade

The interest rate on Government debt fell yesterday by roughly 0.2% as the markets reacted positively to the announcement on Friday night that Moody’s had upgraded Irish sovereign debt to investment grade.

The NTMA will begin a series of auctions over the next week or two to raise €4bn over the remainder of the year.

Donal O’Mahoney, global strategist at Davy Stockbrokers, said the way is now clear for a series of further upgrades on the basis of the ongoing adherence to the fiscal targets; the resumption of growth in the economy with the result that debt/GDP is declining; and, the continued stabilisation of the banking system.

“Note that Moody’s Market Implied Rating for Irish sovereign is A3 (and rising), while S&P has Ireland on a positive outlook since Jul 2013 (as a BBB+ credit), with a clear risk of elevation to A- terrain during either Jun 6 or Dec 5 windows.”

However, future Moody’s actions less relevant than the first, the restoration of Ireland’s across- the-board investment grade status is triggering potentially profound consequences for depth of both primary and secondary market activity, he added.

Market sentiment towards Ireland has been improving over the past 18 months. This culminated in the successful exit from the EU/IMF bailout programme last month.

“Ireland has clearly turned a corner and you’re starting to see that reflected in the ratings,” said Allan von Mehren, the chief analyst at Danske Bank A/S in Copenhagen. “We’re going to see a continued grind lower in yields in peripheral countries as investors look for places where they can get yield pick-up and as long as fundamentals are also improving.”

The interest rate on Irish two-year debt fell 10 basis points to 0.70% after decreasing to 0.66%, the lowest level since Bloomberg began tracking the securities in Nov 2003.

Moody’s cut Ireland’s rating five times in two years before assigning junk status in Jul 2011. To an extent, investors — who often ignore rating changes — already upgraded their view of Ireland.

The debt office sold new 10-year bonds last week through a group of banks at the lowest borrowing cost for more than 13 years.

Investors should keep betting Irish bond yields will decline relative to German bunds, according to Peter Goves, a fixed- income strategist at Citigroup in London.

“This is a significant event with far-reaching implications,” he wrote in a research note following the Moody’s announcement.

“Ireland is now eligible to those investors that might have been previously precluded from investing in sub-investment grade government bonds.”

The extra yield investors demand to hold Ireland’s 10-year bonds instead of their German equivalents shrank 19 basis points to 150 basis points after contracting to 135 basis points on Jan 7, the least since Apr 2010.

(Additional reporting by Bloomberg)