Irish 10-year bond yield hits one-month low on rating upgrade hopes

The State's 10-year government bond yield fell to a one-month low on Friday, outperforming euro zone peers ahead of a Moody's ratings review that some say could result in an upgrade for Europe's fastest growing economy. Most euro zone bond yields were flat to a touch lower, with benchmark German Bund yields close to Thursday's one-month low as data showed stronger-than-expected German economic growth in the first quarter.

But Irish yields fell 4 basis points with analysts at Commerzbank and Rabobank saying there was a likelihood that Moody’s could upgrade Ireland’s Baa1 rating, for which it currently has a positive outlook.

This view runs contrary to the results of an Irish Times poll of economists and analysts, however, which this week had a majority expecting Moody's to hold off on a move on Friday.

Fiscal position

A fall in the Republic’s debt-to-GDP ratio below 100 per cent, a commitment to improving the fiscal position and progress in strengthening the banking sector all bode well for a ratings upgrade, analysts said on Friday.

“A stronger economy is helping bring down Ireland’s debt-to-GDP ratio at a fast pace and the new government, while in a minority, remains committed to fiscal consolidation,” said Lyn Graham-Taylor, a fixed income strategist at Rabobank.

“We’re confident about a one-notch upgrade.”

Ireland’s 10-year bond yield fell to 0.82 per cent , the lowest level in just over a month, outperforming German and French yields which were steady at 0.15 per cent and 0.50 per cent, respectively .

The outperformance helped to narrow the yield gap between Irish and German bonds to about 69 basis points - down from 79 basis points a week ago when the spread was at its widest since late February.

The Irish/French 10-year yield spread has narrowed about seven basis points over the past week. Commerzbank analysts said a ratings upgrade together with the completion of Irish bond issuance for the second quarter should allow Irish bonds to keep a bullish momentum against French peers even with Britain’s referendum on EU membership looming in June.

Volume

Cantor Fitzgerald analysts estimate that the average daily volume in Irish government bonds has fallen 40 per cent since 2016 began as investors withdraw ahead of the British vote.

For some analysts, the UK referendum was a reason to remain cautious towards Irish bonds.

"Moody's rating on Ireland has lagged Fitch and S&P, so Irish bond prices are appreciating on the back of expectations for an upgrade today," said Natixis fixed income Cyril Regnat.

“But I would be a bit more cautious because if we get a Brexit, then Ireland would be one of the biggest casualties in the euro zone,” said Natixis strategist Cyril Regnat.

Research by Davy Stockbrokers shows that a 1 per cent decrease in UK economic output has led in the past to a 0.3 per cent drop in the Republic.

Reuters