LONDON: Irish 10-year bond yields hit their lowest level in almost a month on Friday, outpacing euro zone peers before a Moody’s ratings review that may end with an upgrade for Europe’s fastest growing economy.
Most euro zone bond yields were lower, with benchmark German Bund yields heading back towards Thursday’s one-month low even as data showed stronger-than-expected German economic growth in the first quarter.
Ratings were in focus with Moody’s expected to report on Ireland and Standard & Poor’s scheduled to give an update on Italy later in the day.
Commerzbank and Rabobank said there was a likelihood that Moody’s could upgrade Ireland’s Baa1 rating, which has a positive outlook.
A fall in the debt-to-GDP ratio, a commitment to improving Ireland’s fiscal position and progress in strengthening the banking sector all bode well for a ratings upgrade, analysts said.
Ireland has rebounded quickly from a 2010 international bailout and its economy benefited in 2015 from further falls in unemployment, a bumper year for retail sales and a weak euro that boosted the large export sector.
The Irish economy grew by 7.8 percent last year, making it the fastest growing economy in the European Union for a second straight year.
Political uncertainty has also eased a little after Enda Kenny was re-elected Ireland’s prime minister a week ago, ending 10 weeks of political deadlock.
“A stronger economy is helping bring down Ireland’s debt-to-GDP ratio at a fast pace and the new government, while in a minority, remains committed to fiscal consolidation,” said Lyn Graham-Taylor, a fixed income strategist at Rabobank.
“We’re confident about a one-notch upgrade.”
Ireland’s 10-year bond yield fell three basis points to 0.83 percent, the lowest level in almost a month, outperforming German and French yields that shed 1.6 and 1.9 bps respectively .
The out performance helped to narrow the yield gap between Irish and German bonds to about 70 bps – down from 79 bps a week ago when the spread was at its widest since late February.
The Irish/French 10-year yield spread has narrowed about 6 bps over the past week, with Commerzbank analysts expecting Irish bonds to keep a bullish momentum against French bonds even with Britain’s referendum on EU membership looming in June.
Britain is one of Ireland’s biggest trading partners and a vote to leave the European Union — or Brexit — is a risk for the Irish economy.
Cantor Fitzgerald analysts estimate that the average daily volume in Irish government bonds has fallen 40 percent since 2016 began as investors withdraw ahead of the British vote.
In contrast to Ireland, Commerzbank expressed some caution over Italian bonds ahead of an S&P ratings review but expected the agency to affirm Italy’s rating at BBB- with a stable outlook.
Copyright Reuters, 2016
Courtesy : BRecorder