ONE US mutual fund has made an estimated €6 billion investment in Irish government bonds that accounts for 7 per cent of the outstanding government debt. It is a remarkable vote of confidence in the future of the Irish economy.
It is also a very big bet that Ireland will not default on its sovereign debt. The investment – or wager – has produced impressive returns for Franklin Templeton, its owner. The fund backed up its judgment with billions of euro, having carefully assessed risk and reward. The contrarian investor buys when others are selling and sells when others are buying. Michael Hasenstab, the celebrated fund manager who is credited with taking the Irish investment decision, has been the contrarian boldly challenging the market consensus, and winning. He was buying when other large holders of Irish sovereign debt were dumping Irish bonds, fearful of a default.
Bond yields and prices are inversely related. Bonds make money for investors when the yield – the interest rate on the bond – falls and the price rises. The yield on 10-year government bonds, the standard measure of the cost of sovereign borrowing, has seen Irish bond yields fall from over 14 per cent in 2011 to under 6 per cent. Few bond markets have provided better returns. Irish 10-year yields are now below those of Spain, Portugal and Greece, and just above those of Italy.
Lower borrowing costs can be seen as a reward for a determined national effort to meet the ambitious targets set in the EU-IMF bailout programme. Indeed for Mr Hasenstab, Ireland “offers a road map for other governments that face large debt burdens”. Certainly the National Treasury Management Agency (NTMA) can be happy with its success in finding a willing buyer of large amounts of Irish debt. Nevertheless, some worry must remain where one large investor does hold such a sizeable share of outstanding government debt. That raises the question: how much can the lower yields on Irish debt be attributed to the sizeable bond purchases of one investor, Franklin Templeton. Certainly, a more diverse investor base in Irish bonds would provide a surer foundation to the NTMA’s efforts to lower Ireland’s borrowing costs. And in that regard its efforts to diversify Ireland’s sovereign funding programme, via its recent sale of €1 billion of bonds to meet the needs of the Irish pensions industry, marks a new departure. Like Mr Hasenstab, pensioners and members of pension schemes that buy these sovereign annuities will also find themselves betting that Ireland avoids a debt default.