Investors shrug off Moody’s Irish upgrade amid rate hikes fears

If anything it was a surprise that Moody’s, which was the most pessimistic ratings agency about Ireland’s ability to repay its debts during the financial crisis, decided on Friday to upgrade its view on the State’s creditworthiness.

The global economy and financial markets have, after all, taken a turn for the worse since Moody's peers, Fitch and DBRS Morningstar upgraded their views of the Irish sovereign in January.

The market interest rate, or yield, on Ireland's 10-year bonds have jumped from 0.47 per cent to 1.81 per cent over the same period, to levels last seen in late 2014, months before the European Central Bank (ECB) fired up its money-printing presses with multibillion-euro bond-buying programmes.

The rate differential – or spread – between the benchmark Irish bonds and similar German bonds has widened from 0.5 percentage points to over 0.67 points since late January. It may be much narrower than the two percentage point gap that has developed between German and Italian 10-year bonds, but as the ECB winds down its quantitative-easing stimulus programmes and prepares to hike rates later this year to rein in runaway inflation, markets are looking at individual euro zone sovereigns afresh. And old cracks are starting to reappear.

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While Moody's, which downgraded Ireland's credit rating to outright junk in July 2011, was happy enough to upgrade Ireland on Friday – as a result of the State's improved economic resilience through Brexit, the Covid-19 pandemic and the turmoil so far caused by the Ukraine war – it remains slightly more cautious than its peers. Its one-notch upgrade to the Republic's rating, A1, remains a level below those of Fitch, DBRS and Standards & Poor's.

But just as financial markets had already moved on from pricing in the worst and bond yields had started to come down before Moody’s took out its red pen in 2011, investors are paying little heed to its upgrade late on Friday.

They were far more preoccupied by the comments of hawkish ECB policymaker Robert Holzmann, governor of the Austrian central bank, on Saturday that the ECB should hike interest rates three times this year to combat surging inflation.

It pushed euro-zone bond yields higher across the board on Monday, with the Irish 10-year rising almost 0.1 percentage points on the day.