Mais Oui: Bond Market Darling Ireland Set to Be the Next France

Noonan photo.

Irish Finance Minister Michael Noonan.

Aidan Crawley/Bloomberg

Ireland’s bond rally has already allowed it to shed the stigma attached to the euro-region’s weakest members. Next stop: joining the area’s strongest.

Though yields on 10-year Irish government bonds have plunged to 1.2 percent from 14.2 percent in July 2011, there is probably more room to go as Ireland continues to rebound after the worst recession on record, said analysts from Copenhagen to Dublin. France pays 0.95 percent to borrow for 10 years.

“Irish fundamentals will outshine Belgium and even France within the next couple of years,” said Anders Moller Lumholtz, an analyst at Danske Bank A/S in Copenhagen, which participates in Irish government bond auctions as a primary dealer. “We still expect the outperformance to continue.”

The optimism is driven by analyst confidence that Moody’s Investors Service will upgrade the nation’s credit rating in September as debt levels fall and the Irish economy once again outpaces the rest of the euro region. The Irish gross domestic product is now bigger than before the 2008 devastation from the worst real estate crash in western Europe, a disaster that had helped it earn the ‘I’ in the PIGS moniker used to describe the region’s most problematic economies alongside Portugal, Greece and Spain.

“While the yield on the Irish 10-year isn’t enough to get overly excited about, Ireland’s economic outperformance and the potential for technical boosts from further ratings upgrades leaves this on the buy list,” according to Philip O’Sullivan, an analyst in Dublin at Investec Plc.

Sweet Spot

The spread between Ireland’s 10-year benchmark government bond and German security of a similar maturity has dropped to 57 basis points from 298 basis points just over two years ago. The German and French spread is 31 basis points, while the spread between German and Belgian securities is 35 basis points.

“Not only will Ireland be the fastest-growing economy in the euro-area this year, the gap is widening,” said economists Dermot O’Leary and Juliet Tennent at Goodbody Stockbrokers in Dublin. “Ireland is in a cyclical sweet spot.” Ireland’s gross domestic product will grow 3.6 percent this year, while France’s will expand 1.1 percent and Germany by 1.9 percent, according to the most recent European Commission forecasts. Goodbody predicts 5.5 percent growth for Ireland.

Analysts cite two main reasons for continuing to recommend Irish debt. First, the economic surge means that debt as a percentage of GDP will drop to about 100 percent this year, down from its 2013 peak of 120 percent, according to Goodbody. That compares with 107 percent in Belgium.

Second, the Moody’s increase on Ireland’s rating from Baa1 next month is so widely anticipated that Danske went so far as to say the move should be a “done deal.” While the ratings company restored Ireland’s investment grade last year, the lack of a A-grade rating means some investors aren’t allowed buy the debt, Danske said. France is rated Aa1, while Belgium is Aa3.

“Ireland should, in our view, no longer be grouped with the peripheral countries but rather with Belgium and France,” said Moller Lumholtz at Danske.

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