Irish bonds outperform all euro states bar Austria

IRELAND’S BONDS are poised to outperform those of every other euro member except Austria this quarter as investors bet it will be more successful than countries such as Greece in cutting its budget deficit.

The State’s debt returned 3.4 per cent this year, according to Bloomberg/EFFAS indexes. Yields on 10-year Irish bonds fell to within 128 basis points of those on German bunds on March 12th, a 14-month low.

Crédit Agricole and Royal Bank of Scotland anticipate that spread may drop to about 65 basis points by the end of 2010 as the bonds keep rising.

Public sector pay cuts and the creation of the National Asset Management Agency (Nama) to purge lenders of toxic property loans have helped cut the yield premium investors demand to hold Irish debt over German bunds by more than 50 per cent from a 16-year high.

A year ago, credit downgrades and concern that Ireland would be unable to curb its budget gap prompted investors to include the country in a group they called PIIGS, for Portugal, Ireland, Italy, Greece and Spain.

“Ireland has left the pigsty for the time being and it has come out smelling of roses,” said Stuart Thomson, who helps oversee more than $100 billion as chief market economist at Ignis Asset Management in Glasgow, Scotland.

“It doesn’t face the same problems that the southern Mediterraneans face this year.”

Only Austrian bonds have performed better than Ireland’s this quarter, returning 3.5 per cent, Bloomberg/EFFAS indexes show.

Italian debt has returned 1.8 per cent, Portugal’s bonds have made 0.8 per cent, Spanish debt has gained 2.1 per cent and Greece’s bonds have lost 0.6 per cent. Germany’s have gained 2.5 per cent.

Ignis increased its holdings of Irish bonds to “overweight” last month, meaning it owns a greater percentage of the debt than in the indexes it uses to measure performance, Mr Thomson said. It has an “underweight” holding of Greek, Italian, Portuguese and Spanish securities.

A slump in Ireland’s property market may still force the Government to increase aid to banks, widening a budget deficit that was 11.7 per cent of gross domestic product in 2009, said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets, a broker for banks and investors.

“Our biggest concern is that the weak property market could prompt further writedowns by Irish banks, prompting more sovereign support,” Mr Stamenkovic added.

The euro has slid 5.6 per cent against the dollar this year on concern that some of Europe’s most recession-hit economies will struggle to narrow deficits and pay debt.

“Ireland has shown its Government is committed to austerity measures,” said Luca Franchi, who helps manage €22 billion as head of fixed income and currencies at UBI Pramerica SGR in Milan.

“The commitment shown by the Irish Government puts them in a better situation.” – (Bloomberg)