Dutch broker urges Government bonds buy-up
Wednesday April 01 2009
Dutch broker ING Wholesale Bank yesterday urged investors to pile into 10-year Irish Government bonds as they currently reflect an even more pessimistic outlook than implied by Standard & Poor's downgrade this week.
S&P pulled it is 'AAA' rating on Ireland on Monday, lowering it by one notch to 'AA+' in the belief that the Government's emergency Budget next Tuesday will not go far enough to repair the country's fragile finances.
But Padhraic Garvey, head of investment-grade bond strategy at ING, told clients yesterday that the costs of protecting Irish bonds from default in the so-called credit default swaps (CDS) market "are consistent with a single-A rating".
"The fact that S&P downgraded Ireland was not a huge surprise. All the ratings agencies had either a 'negative outlook' (S&P and Moodys) or 'negative watch' (Fitch) disclaimer attached," to their triple-A stance on Ireland, he said.
The strategist said the country's top rating was in jeopardy after the nationalisation of Anglo Irish Bank, which affected his 'score' on the entire banking system. "This, together with the deficit and debt profile, alongside an already high private sector credit burden and deteriorating competitiveness position" pointed to a downgrade, he said.
"If you hold the Irish 10-year bond you're getting 50 basis points (0.5pc) more than you should" when the fundamentals of the Irish economy are weighted against eurozone countries," he said.
"It's by far the cheapest market out there on this measure. We maintain our view that current spreads are pricing in too much negativity."
Downgrade
The difference in yield, or spread, between 10-year Irish government bonds and equivalent German securities widened after the downgrade.
The spread between both increased nine basis points to 247 points by early yesterday evening.
Irish bonds lost investors 4.5pc this year, the worst performance among western European nations, while German government debt has delivered a 0.5pc return.
Davy economist Rossa White said he believed S&P was "too pessimistic" in believing Ireland's economy will underperform the eurozone for the next five years and that there will be no "credible multi-year fiscal plan" until after the next general election in 2012.
"We expect detailed plans for the next few years to emerge at next week's Budget.
- JOE BRENNAN
