Irish bonds slump on downgrade

Irish 10-year bonds slumped for a sixth day, sending yields to a euro-era record, after the country became the third in the currency union to have its credit rating cut below investment grade.

Ratings agency Moody's last night said it had downgraded Irish debt to "junk" status, hours after Minister for Finance Michael Noonan said that measures to aid Greece proposed by euro zone finance ministers would benefit Ireland.

Explaining its decision, Moody's said the measures being contemplated for Greece had increased the chance that Ireland might default on some of its debts if it has to seek another bailout from Europe.

Two-year Irish note yields also surged to a record today.

The downgrade of Irish debt has been criticised by the Government, the European Commission and analysts.

Bloxham analysts said the downgrade would prompt some forced selling by investors who are not allowed to hold non-investment grade securities, and would be dropped from some of the bond indices.

“In our view this latest move by Moody’s is cynical and manipulative coming just two days before the EU-IMF in their latest quarterly review are expected to give Ireland the thumbs up in meeting all its bailout targets,” analysts wrote in a note. “The bottom line is that the credit ratings agencies have far too much power but policymakers and regulators only have themselves to blame.”

Ireland's downgrade "puts the focus back on the euro crisis as a whole," said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. "It all boils down to how much money Europe can mobilise to bail out the distressed countries and how much debt relief is needed to bring them back on track."

Irish 10-year yields increased almost 41 basis points to 13.75 per cent at 3.39pm in London. The 5 per cent security due in October 2020 fell 1.37, or €13.7 per €1,000 face amount, to 55.63. Two-year Irish note yields climbed to a record 20.1 per cent.

The yield difference, or spread, between Irish 10-year bonds and similar maturity benchmark German bunds widened to a record 11.06 percentage points.

Goodbody economist Juliet Tennent said the reasons given for cutting the rating were in line with those cited for Portugal’s downgrade last week and “highlights the fact that the downgrades have more to do with the design and the structure of the ESM than the dynamics of the underlying economies”.

“The downgrading of Ireland’s credit rating to junk by Moody’s will further sour sentiment towards the sovereign (and indeed the euro zone) and while one would expect that the majority of ratings sensitive deposits have already left the banking system and that the majority of institutional investors are already underweight sovereign debt, it does make the road back to a self funding position for Ireland and the banks more difficult,” she wrote.

Ten-year bund yields slid as low as 2.50 per cent yesterday, the least since November, as European finance ministers failed to present a solution to contain the region's debt woes. Bonds from Italy and Spain slumped yesterday amid concern the debt crisis is spreading, before recovering amid speculation that central banks bought securities to stabilise the market.

Italy's 10-year bonds declined, reversing an earlier advance, as the nation prepares to sell more than €3 billion of debt tomorrow. German 10-year bunds were little changed as the nation auctioned fewer bonds than its maximum
target.

Italy plans to sell up to €1.25 billion of 3.75 per cent securities maturing in 2016, up to €1.75 billion of 4.5 per cent 2026 debt and an unspecified amount of 2017 and 2023 bonds tomorrow.

"The ability to fund oneself is the big issue right now," said Luca Jellinek, head of European interest-rate strategy at Credit Agricole CIB. "The Italian auction tomorrow is very important. Italy has to issue huge amounts, so that's something the market will be watching."

Credit-default swaps insuring Irish bonds climbed one basis point to 1,000, signalling a 58 percent chance of the Government failing to pay in the next five years, while contracts on Greece fell 25 basis points to 2,265, after earlier rising to a record, according to CMA.

The Markit iTraxx SovX Western Europe Index of swaps on 15 governments declined four basis points to 280.

Ireland's downgrade isn't sufficient for Irish bonds to be removed from the Markit iBoxx Euro Area Sovereign Index, RBC Capital Markets said. IBoxx uses an average rating based on a score system comprised of assessments from Moody's, Standard and Poor's and Fitch Ratings, Norbert Aul, a European rates strategist in London, said. Because it's rated higher at the other agencies, Ireland will remain above iBoxx's rating threshold.

Additional reporting: Bloomberg