Irish Bonds Lead Rally in Euro-Area Debt After Moody’s Upgrade
Ireland’s bonds advanced for a fourth day after Moody’s Investors Service raised the nation’s credit rating back to investment grade, boosting confidence in the securities of the euro area’s most indebted nations.
The nation’s 10-year yields fell by the most since September 2011 after Moody’s increased the rating to Baa3 with a positive outlook on Jan. 17. The decision means all three of the main credit rating companies now rank Ireland as investment grade. Spain’s bonds also rallied, with 10-year yields dropping to the lowest since 2006, while similar-maturity Italian yields fell to the least since May. Germany’s benchmark bund yields dropped to the lowest in six weeks.
“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.”
Ireland’s 10-year yield dropped 20 basis points, or 0.2 percentage point, to 3.24 percent at 4:40 p.m. London time, the biggest decline since Sept. 29, 2011. The 3.4 percent bond maturing in March 2024 rose 1.695, or 16.95 euros per 1,000-euro ($1,356) face amount, to 101.335.
The two-year rate fell 10 basis points to 0.70 percent after decreasing to 0.66 percent, the lowest level since Bloomberg began tracking the securities in November 2003.
Moody’s cut Ireland’s rating five times in two years before assigning junk status in July 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. Ireland exited its bailout program in December.
Investors should keep betting Irish bond yields will decline relative to German bunds, according to Peter Goves, a fixed-income strategist at Citigroup Inc. in London.
“This is a significant event with far-reaching implications,” he wrote in a research note on Jan. 17 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 April 2010.
Ireland may release an auction plan in the next week or two, said John Corrigan, chief executive officer of the National Treasury Management Agency, speaking today in an interview with national broadcaster RTE.
The country still has about 4 billion euros to raise this year, though the size of the individual sales will be “modest,” he said in the interview.
Volatility on Irish bonds was the highest in euro-area markets today, followed by those of Portugal and France, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.
Spain’s 10-year yields fell three basis points to 3.69 percent after dropping to 3.64 percent, the lowest since September 2006. That’s down from a euro-era high of 7.75 percent set in July 2012.
Similar-maturity Italian yields declined as much as four basis points to 3.78 percent, the least since May 3.
Yields in the euro-area’s peripheral nations are falling as their economies recover from the debt crisis that sparked a recession and pushed up borrowing costs to records. Portugal is planning to resume bond auctions in the first half of this year as the end of its 78 billion-euro rescue program approaches. Greece said it may sell five-year notes in the second half.
Portuguese bonds offer “real value,” Padhraic Garvey, head of developed-market debt at ING Bank NV in Amsterdam, wrote in an e-mailed note. “The most likely dynamic going forward is for Portugal to slip into low investment-grade status” by 2015, he said.
Standard & Poor’s removed its negative “creditwatch” on Portugal on Jan. 17, saying it no longer saw an imminent risk of a downgrade. The outlook was maintained at negative with a BB rating, two levels below investment grade.
Investors should buy two- and five-year Portuguese notes to benefit from “exceptional” spreads, ING’s Garvey said, referring to the difference between Portuguese yields and their German equivalents.
Portugal’s 10-year yield declined 13 basis points to 5.10 percent, the lowest level since August 2010. The two-year rate was little changed at 2.39 percent.
Germany’s 10-year yield dropped one basis point to 1.74 percent after reaching 1.73 percent, the least since Dec. 3. Similar-maturity French rates decreased two basis points to 2.39 percent.
Ireland’s bonds returned 11 percent in the 12 months through Jan. 17, Bloomberg World Bond Indexes show. Spain’s gained 13 percent and Italy’s earned 7.1 percent.