Analysis: Investors staying calm in anticipation of FG-FF deal

If this is chaos, then forget stability.

Almost two weeks after voters routed Enda Kenny’s coalition, Ireland will enter political limbo when the Dáil sits today.

Neither Mr Kenny nor any rival will be able to command a majority, leaving him as caretaker taoiseach while brokering between parties continues.

After similarly inconclusive elections in Portugal and Spain toward the end of last year, it’s exactly the kind of turmoil that Mr Kenny urged voters to avoid.

Yet Ireland’s borrowing costs have fallen since the ballot, with investors anticipating Fine Gael will ultimately form a first-ever grand coalition with Fianna Fáil.

“The market is not very concerned about the exact nature of a combination, or indeed about how long, within reason, it will take to form the new government,” said Eoin Fahy, chief economist at Kleinwort Benson Investors in Dublin.

“The key issue is that the prospect of a Fianna Fáil-Sinn Féin coalition now seems highly unlikely. ”

Around the same time the Dáil meets, the NTMA will sell €500m of six-month of Treasury bills.

All indications are investors are not worried. Ten-year Irish bonds yielded 0.85% on Tuesday, narrowing the premium over German bunds to 69 basis points from 83 basis points just before the election.

On March 3, the yield on Ireland’s five-year note dropped below zero for the first time.

In part, that’s because Mario Draghi, since becoming ECB president in November 2011, has cut interest rates eight times and expanded and extended an asset-purchase programme.

It has helped keep a lid on political risk. While Portuguese bond yields rose because of concern a new government would ease on austerity, Spain’s have fallen since its December election.

The country is still without a government, though the yield on 10-year securities dropped 10 basis points to 1.56%.

“Investor reaction was pretty muted, with many distinguishing between the current domestic Irish political risks and those faced by investors in both Portugal and Spain,” Cantor Fitzgerald said in a note.

Bloomberg