US trader holds $2.5bn in Irish government bonds

CALIFORNIA-BASED investment manager Franklin Templeton Investments has built up a significant position in Irish government bonds.

According to reports in the New York Times, a fund controlled by 38-year-old trader Michael Hasenstab began buying Irish bonds and increasing its exposure to Hungary in the middle of last year.

Filed accounts show the fund increased its holding of Irish bonds from zero in May to $685 million in August and $2.49 billion by the end of November – coinciding with a period when most investors were shying away from investing in Ireland following the downgrading of Irish government debt to junk status by Moody’s in July and ongoing turmoil in the euro zone.

Franklin Templeton’s total exposure across its various US and European-registered funds could stand at between €5 and $10 billion.

A spokeswoman for Franklin Templeton declined to comment yesterday. According to sources in Dublin, a number of US buyers have come into the bond market in recent months.

Although Ireland has been out of the bond markets since 2010, government bonds are still traded in the secondary market. Irish bonds have been one of the best performing bonds over the last year, rallying approximately 35 per cent since July.

According to Dolmen Stockbrokers, a sample investor who bought €10,000 in Irish government bonds at the end of June would have seen a gain of about €4,038 in the intervening period.

Irish bond yields reached dizzying heights last July, but a series of events such as a reduction in the interest rate on bailout funds, a stronger than expected economic performance last year and favourable troika reports on Ireland’s implementation of austerity measures appear to have shifted sentiment.

Irish bond values have increased since July, meaning that yields – which are inversely proportionate to the value of the bond – have fallen dramatically. The Irish two-year bond, which traded at 22 per cent in July and around 10 per cent in November, is now trading at just over 4 per cent.

Goodbody Stockbrokers said yesterday that the fall in the yield on Irish government bonds may prompt the National Treasury Management Agency to return to the bond market after the European Central Bank issues its second round of three-year loans later this month.

Last month, the NTMA, the agency responsible for managing Ireland’s national debt, swapped a note due to be repaid in 2014 for one maturing a year later in 2015 to smooth its funding requirements.

Goodbody’s Dermot O’Leary said the next foray into the market is likely to be a syndicated issue, rather than an auction process, whereby bonds would be issued to a pre-selected group of investors and underwritten.

Treasury and short-term debt is likely to be issued in the first instance. In a note yesterday, Bank of Ireland also said the bond rally raises the possibility that Ireland may return to the bond markets earlier than expected. “The precipitous fall in Irish yields of late have prompted speculation that Ireland may return to the market much earlier than anyone expected,” Dan McLaughlin, chief economist at Bank of Ireland, said.

Debate about whether Ireland may seek a second bailout surfaced last month following comments by Citigroup economist Willem Buiter. Ireland faces a key funding challenge just a month after it is due to exit the bailout programme in January 2014, when a bond of about €12 billion is due for repayment, though this was reduced by €3.5 billion by last month’s bond swap.