Ryan McGrath Comments: Stocks Selloff Is Good News for Irish Bonds as Yields Converge

 January 07, 2016, Bloomberg News – Online

Irish economy growing faster than euro peers like France 

Moody’s watches for upgrade as Ireland prepares to sell bonds 

Ireland’s journey from crisis to comeback is approaching another milestone for bond investors. 

The country’s benchmark 10-year bond yield plunged back below 1 percent this week as investors took money out of stocks and put it into the relative safety of fixed income. The premium in the cost of borrowing compared with France has declined to 12 basis points from 45 points a year ago, and banks and brokers expect the gap to close in 2016. 

“Ireland’s bonds are on fire and seem to be benefiting more than most from a general switch at the moment from equities,” said Ryan McGrath, an analyst at Cantor Fitzgerald LP in the Irish capital. “There is a feeling that Irish bonds should have converged more quickly with the European semi-core countries like Belgium and France. ” 

Ireland’s National Treasury Management Agency is selling about 3 billion euros ($3.3 billion) of 2026 bonds in Dublin on Thursday, at a yield of about 1.14 percent. The agency drew about 9.6 billion euros of orders. 

It’s a remarkable turnaround for a country that, like Greece and Portugal, was shut out of bond markets as recently as 2012 because of a banking crisis that forced the government to seek international aid. With its economy geared more toward the U.S. and Britain than the sluggish euro region, Ireland is forecast by the European Commission to grow three times more quickly than France and Belgium this year. 

Irish Phoenix 

Two years after exiting its bailout program, the government is close to running a balanced budget and its debt as a proportion of its economy will drop below France’s this year, according to the Commission. 

There’s also the possibility of an upgrade to its credit rating by Moody’s Investors Service after an election due by April. Moody’s, which cut Ireland to junk almost five years ago, lifted Ireland twice in 2014 and has a positive outlook, but has yet to restore its A grade. 

“The ingredients are all there for the Irish recovery to continue,” said David Schnautz, a rates strategist in London at Commerzbank AG, which called Ireland a “phoenix from the ashes.” “We are in the camp of Ireland fully converging with France and Belgium.” 

Ireland’s benchmark 10-year bond yields 0.99 percent, while French yields were at 0.87 percent. 

ECB Vacuum 

At the same time, the bond market in the euro region isn’t always a reflection of a country’s prospects because of purchases of securities — to the tune of 60 billion euros a month — by the European Central Bank. 

The ECB is vacuuming up Irish bonds as part of that quantitative easing program. Based on Ireland’s contribution to the euro region’s economy, the central bank would buy about 8 billion euros of Irish debt, said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan, who recommends buying Irish bonds rather than French debt. 

Those purchases by the ECB in the market would offset the lion’s share of sales planned by the Irish debt agency in 2016. By contrast, the ECB will absorb about 90 billion euros of French debt, less than half of the nation’s sales this year, said Cazzulani. 

The ECB adds to Ireland’s allure, said Jens Peter Sorensen, chief analyst at Danske Bank A/S in Copenhagen. “Ireland stands out in 2016,” Sorensen said.