Markets welcome ratings upgrade as bond yields fall

Bond markets have responded positively to Friday’s ratings action from Moody’s, with bond yields on Irish debt recording a further drop this morning. The yield on 10- year bonds tightened by 14 basis points, down to 3.3 per cent.

In a statement on Friday night, Moody’s said that it was upgrading Ireland’s credit rating by one notch to Baa3, the lowest investment grade. Prior to the financial crisis Ireland held a AAA or “triple A” rating, the highest possible. Moody’s also changed the outlook for Ireland’s credit rating from stable to positive, holding out the prospects of a further upward re-rating later in the year. Moody’s said the reasons for the upgrade were the growth potential of the economy and the Government’s exit from the EU-IMF bailout. Ireland is now eligible to investors previously precluded from investing in sub-investment grade bonds

Speaking to Rte radio this morning, John Corrigan, chief executive of the National Treasury Management Agency (NTMA), said that Ireland may benefit from a further upgrade within 15-18 months, and that Friday's decision may bring interest in Irish bonds from Japan and the Far East.

Mr Corrigan also said that the agency may make an announcement with regards to its auction plan in a week or two, and that Irish debt will peak at about 120 per cent. The NTMA expects to raise a further €4 billion this year.

Citigroup strategist Peter Goves said that the rating action came earlier than anticitpated and goes beyond expectations. He asserted that Irish bonds may now gravitate toward the "soft core" of EMU, more quickly than anticipated. Furthermore, he doesn't rule out another Moody's upgrade later in 2014.

“Ireland has clearly turned a corner and you’re starting to see that reflected in the ratings,” said Allan von Mehren, the chief analyst at Danske Bank A/S in Copenhagen. “We’re going to see a continued grind lower in yields in peripheral countries as investors look for places where they can get yield pick-up and as long as fundamentals are also improving.”

“Bottom line, the Moody’s move on Ireland was overdue but is still an importantconfirmation of the market discount, and especially as the market is discounting more positive developments,” said Padhraic Garvey, global head of developed markets debt & rates strategy at ING Bank in Amsterdam.

Mr Garvey notes that ING’s own credit rating model pitches Ireland at BBB+, and thus suggests that Moody’s is “still behind the pace”.

(Additional reporting: Bloomberg)