State borrowing costs fall again as ECB buys debt

RATINGS:IRELAND'S BORROWING costs fell again yesterday as ratings agency S&P reaffirmed the State's investment-grade credit rating and the European Central Bank continued buying Irish debt in the secondary market.

Against the backdrop of rapidly unravelling Italian and Spanish bond markets, Irish bonds have been quietly but steadily outperforming in recent weeks, with yields moving on a downward trajectory.

According to traders, the ECB continued buying Irish bonds yesterday after resurrecting its dormant Securities Market Programme on Thursday.

However, Irish bond yields began falling well before this intervention. The catalyst for the volte-face in sentiment towards Irish debt is believed to have been the reduction in the State’s bailout interest rate achieved at the emergency Brussels summit on July 21st.

Ireland’s creditworthiness received a further vote of confidence yesterday with S&P’s reiteration of a BBB+ rating for the State’s sovereign debt, reflecting its belief in the Government’s ability to stabilise public finances.

It also said the outlook for this rating was stable. “In our opinion, the Government’s fiscal strategy should be capable of putting the public finances on a more sustainable path,” the ratings agency said.

Yields on 10-year Irish paper fell by another 37 basis points yesterday to close just above 10 per cent cent. This compares with an earlier record high of more than 14 per cent.

The ECB’s decision to support Irish and Portuguese bonds rather than those in the eye of the storm, ie Italian and Spanish bonds, perplexed analysts yesterday.

Bank of America Merrill Lynch described the move as “puzzling” and said one interpretation was that the ECB may be trying to send a “positive shock” to markets by showing that it stands ready to act, while testing the impact of the revived bond-buying programme on smaller markets.

Davy global strategist Donal O’Mahony said the ECB had chosen the “soft targets” in supporting the smaller Irish and Portuguese bond markets. The rationale behind the move may have been to send a signal to markets that it was “not beyond the bounds of possibility” that the ECB, if pushed by market forces, could intervene in the larger debt markets of Italy and Spain. He also said it would be a “mistake” to think that the only buyer of Irish Government debt was the ECB.

The “fast money” investment community, ie hedge funds, were the “first out of the blocks” in terms of investing in Irish debt at the start of the rally, which began last month. “We’re increasingly seeing a broader church of interest in the market,” he said.

“The market is impressed with our fiscal resolve. We have tailwind behind us now in terms of investor sentiment.”

A widespread sell-off in Irish bonds had been predicted after Moody’s downgraded the State’s debt rating to junk status in July, because certain funds are only permitted to invest in bonds classed as investment grade.

Although bond yields spiked to record highs in the aftermath of the downgrade, they began to retreat after the Brussels summit.

Mr O’Mahony said investment funds tended to look at the average credit ratings across the largest international agencies.

As Fitch and S&P have maintained investment-grade ratings for Ireland, the Moody’s downgrade was not sufficient to trigger the removal of Irish bonds from indices tracked by benchmark fund managers.