In case you didn't know, Ireland is the new core.
Irish government bonds have been tracking the rock-bottom yields of France and Germany since the Brexit vote, an amazing result from one of Europe's sickest sovereign patients at the start of the decade.
That might not last.
A hard Brexit will hurt, especially if the U.K., its largest trading partner, ends up cutting its corporation tax and steals its thunder as an offshore tax haven.
Ireland’s 12.5 percent corporate tax rate is the jewel in its crown. It attracted 7.4 billion euros ($7.9 billion) in corporate tax receipts in 2016, driven largely by foreign direct investment, according to Alan McQuaid, chief economist at Merrion Capital Group in Dublin. This amounts to over 15 percent of its total tax take and equivalent to 2.7 percent of GDP. With the prospect of the U.K. using its own rate as a Brexit bargaining chip, it's not clear Ireland will be able to maintain that level of receipts.
This damage could be magnified if President Donald Trump sticks to his pledge to cut the U.S rate down to 15 percent. Equally, his plan for a tax amnesty for multinational offshore earnings could seriously compromise Ireland’s business model of attracting companies looking for a low-tax entry into the single market. And that's a model that was already under threat, given the European Commission's crackdown on tax avoidance.
Ireland's financing needs mean it will probably issue around 12-13 billion euros of debt this year, at the top end of its expected range and about 50 percent more than in 2016. It's already printed a whopping 4 billion-euro 20-year bond, putting it in the commanding position of settling a third of its annual borrowing target before January was half over.
Contrary to expectations, the government took advantage of its 11 billion-euros order book and bumped up the deal size by a billion to 4 billion euros. Investors won't soon forget how that move crushed the price premium they were expecting.
That's not the only technical hurdle for Irish debt. The central bank's vital bond buying during its chronic banking crisis has left it with the almost-unique status of being right at the cusp of the ECB's 33 percent issue and issuer limits for its Public Sector Purchasing Program .
This means the central bank, a key engine for falling European government bond yields for the past few years, may soon be barred, by its own rules, from buying Irish debt. Purchases have already started dropping off, and its 648 million euros of purchases in December could be above the norm from now on. It's almost as if QE's getting tapered prematurely for Ireland.
Front-loading its 2017 issuance program has the benefit of ensuring that the ECB has a continued supply of debt to purchase, and easing investor worries that its support will be here one minute, gone the next. Asking buyers to forgo central bank air cover is a risky move when the global environment is already pretty tough for fixed income. But even if the ECB soaks some of this pickup in supply, it could still weigh on spreads to the core.
One way around this would be for the ECB to lift its limit, perhaps to the 50 percent level now in place for supranational issues. But this doesn't chime with the mood music emanating from the German Bundesbank, and given that policy makers introduced a raft of changes last month they're not likely to do more at Thursday's meeting.
There are obviously a lot of moving parts to the picture, not least of which is the prospect that Dublin could attract some of the finance jobs that London loses. And Irish banking is on an improving trend -- witness Standard & Poor's upgrade last week of Allied Irish Bank to investment-grade status. But the point is that the political, economic and technical backdrop has got decidedly tricky.
Ireland has come a long way since the dark days of the European debt crisis, but it might find the wind is no longer at the back of its bond market.
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