Cantillon

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Today's bond auction may offer investors opportunity

WHILE CONCERNS about Ireland’s deficit and the cost of stabilising the banking sector may be giving international bond markets the jitters, today’s bond auction may actually offer domestic retail investors an opportunity to benefit from the State’s fiscal woes.

With many analysts perceiving the widening of spreads to be “overdone”, and with an opportunity for yields to reverse once the auction has been completed, investors could stand to benefit from the premium the Irish Government is likely to pay for borrowing the money, with yields hovering at around 5.3 per cent.

If yields should drop by 100 basis points, analysts estimate that investors could get a return of 7.5 per cent in terms of price appreciation, on top of the annual coupon, or interest rate of between 4 and 5 per cent which is offered on the bonds.

Investing in Irish government bonds in the current environment is a play on how much you think the current negativity is overdone and whether or not the Government can get its fiscal house in order – despite the ongoing burden of recapitalising the banking sector.

Although retail investors are generally excluded from bond auctions, with minimum allocations in the region of € 10 million, investors can purchase the bonds subsequently in the secondary market through a stockbroker for amounts of upwards from € 1,000.

A survey by the NTMA last year indicated the costs of purchasing government bonds from a broker range from about € 115 to € 500 for a trade worth € 10,000.

Dolmen Stockbrokers favours the longer-dated 2020 bond, and has a bias for “out-performance on the week”.

However, investors should note that there are risks to the downside too, with the possibility that yields may widen even further over the coming weeks, thereby driving down the price of Irish government bonds.

Two suitors for BZ

Bidders for AIB’s Polish banking arm, BZ WBK, appear to be falling by the wayside. Last week it was reported that Italian bank Intesa had dropped out of the race and yesterday media in France were signalling that BNP Paribas would be keeping its hands in its pockets as it deemed the mooted price tag to be “too expensive”.

BZ is worth about €3.35 billion.

That appears to leave Santander of Spain and domestic player PKO BP as the last two suitors standing as Friday’s deadline for bids edges closer.

AIB boss Colm Doherty would have been keen to keep as many parties as possible in the bidding process as he seeks to get the best price possible for what his chairman Dan O’Connor has described as the bank’s “jewel in the crown”.

Doherty is trying to raise as much capital from the sale of its assets in Poland, Britain and the US to stave off State ownership.

Fortunately for Doherty, PKO BP Group, one of Poland’s biggest financial groups, seems mustard keen to buy BZ WBK.

PKO will report its second-quarter earnings on Thursday, just 24 hours before the bidding deadline.

“Investors will follow not just the figures alone but will also watch for any information about potential acquisitions,” analysts at Czech stockbroker Atlantik FT said in a note to clients on PKO last week.

Atlantik describes PKO as the “most serious candidate” to win the tender for AIB’s 70.4 per cent in BZ WBK.

With the Polish government making it known that it would prefer BZ to return to domestic ownership, it might well be right.

Whether or not than translates into a substantial bid remains to be seen.

Russian ban stokes fears

Russia’s ban on the export of wheat, which kicked in this weekend and will last until at least the end of the year, is the latest development in a commodity crisis that has spooked markets and stoked concern about rising consumer prices for basic food staples.

The worst drought in more than a century, coupled with rampant forest fires, have led some analysts to estimate that Russia’s grain output may fall by 40 per cent this year.

The threat to wheat production took markets by surprise but, despite prices rising to their highest in two years, the prospect of a squeeze on the scale of the 2007-08 global food crisis seems unlikely.

Global food stocks are more than sufficient, while the nature of an industry which works on a futures basis means most companies will be shielded from any immediate impact.

On a more parochial level, the Irish agri-food sector is also well protected. Again, hedging means Irish consumers are unlikely to see any price increase until at least the middle of next year, while margins at food groups such as Aryzta look set to escape major impact for similar reasons. The short-term price hike is, of course, good for Irish grain producers, who will welcome the boost, albeit temporarily.

While the potential impact of the Russian grain crisis should not be completely dismissed – any long-term price hike would have serious consequences here as elsewhere – Ireland’s agri-food sector remains one of the more resilient sectors in the economy.

TODAY

The National Treasury Management Agency auctions between €1 million and €1.5 million of four and 10-year government bonds.

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