Pricey Bonds Deter Goldman as Ireland Exits Bailout

Ireland’s longest bond rally since 2005 is making the securities too expensive for some investors just as the nation begins to rely on their money again.

The extra yield, or spread, over German bunds slid to a three-year low this month as Ireland moved closer to exiting the 67.5 billion-euro ($93 billion) emergency aid program it took in November 2010. Goldman Sachs Group Inc. and BlueBay Asset Management are among the financial companies judging that the yields are now too low for a country that’s barely growing and still with a debt load bigger than its economy.

“With the spreads where they are now, we think there are better stories, better places to invest,” said Russel Matthews, a fund manager at BlueBay in London, which oversees $56 billion and has been putting money into Portuguese and Slovenian bonds. “We are positive on the story, but from a valuation perspective we don’t think it’s that exciting.”

Ireland’s 10-year borrowing costs tumbled to 3.53 percent today from a euro-era high of more than 14 percent in July 2011. That compares with 6.71 percent for Slovenian bonds and 6.17 percent for Portugal, whose government is aiming to follow Ireland and leave its own bailout program next year.

Goldman View

Deutsche Asset & Wealth Management, which oversees $1.24 trillion, reduced its Irish holdings after the rally, even as it remained positive on the outlook for the country, Oliver Eichmann, head of euro fixed income at the company in Frankfurt, said in an e-mail yesterday.

The spread on Irish securities over bunds narrowed to 1.69 percentage points on Oct. 17, the lowest since April 2010, according to data compiled by Bloomberg. The rally has also pushed Irish yields below those of Italy and Spain.

“We currently view Irish bonds as expensive,” London-based Goldman Sachs analysts Francesco Garzarelli and Silvia Ardagna wrote in a note to clients on Oct. 21. “The market has taken a constructive view on upcoming developments” regarding the nation’s return to bond markets, they wrote.

Technical analysis based on how Irish bonds have performed compared with peers supports that view.

The 14-day relative strength index for 10-year Irish securities reached 83.9 last week, the most since April. It has been above 70, a level that signals it has climbed too much, for 20 consecutive days. The gauge was above 70 for 10 consecutive days ending May 10, before the yields climbed more than 50 basis points in the following two months.

Cash Cushion

The outlook for Irish bonds may hinge on whether the country decides it needs to negotiate an additional credit line from its international partners to provide a safety net as it exits the bailout program on Dec. 15.

The government has suggested a 25 billion-euro cash pile amassed by the nation’s debt agency will be enough of a backstop. The agency in Dublin raised 7.5 billion euros from two bond sales via banks in the first quarter of 2013.

“Sentiment toward Irish debt has improved considerably,” said Axel Botte, a Paris-based strategist at Natixis Asset Management, which oversees $783 billion worldwide. “The rally is justified as Ireland’s Treasury has pre-funded its borrowing needs for 2014 and part of 2015.”

Finance Minister Michael Noonan met with International Monetary Fund officials in Washington yesterday after visiting Frankfurt and Strasbourg this month to hash out the details of the bailout exit. The options are “finely balanced,” Prime Minister Enda Kenny said in a letter to European Union President Herman Van Rompuy dated Oct. 22.

Bonds Gain

Natixis holds more Irish bonds than the benchmark it uses to track performance, Botte said, as does Deutsche Asset & Wealth Management. BlueBay, which began buying the securities in mid-2011, holds the same amount as represented in the index it follows, money manager Matthews said.

“We share the positive growth outlook for next year and acknowledge the progress that has been made,” said Eichmann in Frankfurt. “We reduced the overweight following the significant drop in yields.”

Irish bond yields dropped for a third consecutive quarter in the three months ended September, the longest streak of declines since June 2005. The bonds returned 10.2 percent this year after soaring 30 percent in 2012, even as the economy spluttered, the Bloomberg Ireland Sovereign Bond Index shows.

Budget Deficit

Gross domestic product rose in the three months to June 30, ending a second recession since 2008. It gained 0.4 percent from the previous three months, when it fell 0.6 percent, the Central Statistics Office said on Sept. 19.

The budget deficit will narrow to 4.8 percent of GDP next year from 7.3 percent this year as Noonan implements 2.5 billion euros of tax increases and spending cuts. After peaking this year, national debt will drop to 120 percent of GDP by the end of 2014, Noonan said in his Oct. 15 presentation.

“It all hinges on sentiment remaining in their favor,” said Robin Marshall, director of fixed income at Smith & Williamson Investment Management in London. He doesn’t own Irish debt and has no plans to buy it. “You’ve got to ask how much more juice you can squeeze out of it when spreads have come in this far. There’s a lot priced into yields.”

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