Irish bonds react to Moody’s Investors Service upgrade

Irish bonds outperformed its eurozone peers in the first trading day after Moody’s Investors Service upgraded Ireland’s debt pile and delivered a better-than-expected scorecard on the country’s economic outlook.

Ryan McGrath, senior bond trader at Cantor Fitzgerald Ireland, said there was “surprise” that the tone of the upbeat report downplayed the potential risk to the Irish economy if the UK were to vote next month to exit the EU.

Moody’s is scheduled to announce its next sovereign rating decision on Ireland in September, and hopes will now be raised that the ratings firm will further upgrade Irish debt at that time, Mr McGrath said.

In absolute terms, the yield or the interest rate on Irish 10-year bond was trading yesterday at 81 basis points, little changed from Friday.

The spread nonetheless narrowed against the equivalent 10-year bond in France and Belgium, which were at 49 basis points and 54 basis points. 

Earlier this year, Irish bonds had traded as close as 12 basis points above French bonds.

Mr McGrath said it believes that the Irish bond spread can tighten again following the weekend Moody’s updgrade to A3.

Moody’s, in its report, had downplayed the risks to the Irish economy if the UK were to vote for a Brexit on June 23, saying any shock would be “manageable”.

However, a leading investor has said that one of the asset classes most vulnerable to the shock of the UK potentially leaving the EU isn’t hearing the alarms.

Mike Riddell, the London-based money manager at Allianz Global Investor, said so-called peripheral eurozone government bonds are underpricing the risks of a Brexit.

Italian 10-year bond yields offered a premium of 136 basis points over similar-maturity German bunds yesterday. 

Should the UK vote to stay in the world’s largest trading bloc, the spread could narrow to 115 basis points.

However, if the UK were to leave, there is no limit to the potential widening.

Betting on declines in Italian bonds is the most obvious way to trade this risk, Mr Riddell said.

“If the UK voted to leave the EU, as the second largest economy in Europe, then that does not send a good signal for the future of project Europe,” said Mr Riddell.


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