Funding climate improves as bond yields begin to tumble
THE yields on Irish Government debt and credit default swaps on Irish bank debt narrowed dramatically yesterday, suggesting more benign funding conditions for Ireland's sovereign banks.
The yields on 10-year Irish bonds dipped 19 basis points (or 0.19pc) yesterday, while the yields on five-year notes were down 23 basis points and two- year debt was down 14 basis points.
The falls suggest new sovereign debt could be issued at rates comparable to the lower yields investors are now receiving on existing debt.
Market sources confirmed credit default swaps on Irish bank debt -- which measure perceived credit risks of the institution -- had narrowed 100 basis points in recent days.
The gap between the European and US benchmark credit-default swap indexes narrowed to 0.7 basis points yesterday, the lowest since June 4. "The overall funding climate seems to have gotten a lot better," one source said last night, while stressing that the true test would be when banks and governments began major issuances.
The results of last week's banking stress tests are seen as a key factor influencing both the market for government bonds and banks' credit default swaps. The tests found that most banks were not in need of extra capital to withstand further financial crises.
The tests also appear to have reassured investors on the overall health of Europe's banks, lessening fears of default and narrowing default swap spreads.
"It takes one more worry off the map ahead," said Scott MacDonald, the head of credit and economic research at Aladdin Capital Management LLC in Stamford, Connecticut, which oversees about $12.5bn.
"This was something you could quantify and you could qualify. It came, it went, and it was not as bad as people thought it could be."
A new European lending survey out yesterday also showed banks had tightened lending in the most recent quarter, potentially improving their perceived risk profile.
Yesterday's bond market improvements were also linked to a flight of investors from European equity markets, which ended their six-day rally last night amid negative data from the US.
Amongst the Irish banks, AIB will be the first beneficiary of any improvement in the banks funding market as it prepares to go to the market for a multi-billion fundraising in the autumn.
In a note yesterday, ratings agency Standard & Poor's re-affirmed its "negative" outlook on AIB but retained the A-2 rating instated in late January.
"The negative outlook on AIB reflects our view that the amount and timing of equity raised through recapitalization may not be sufficient to support an 'A-' rating," the ratings agency said in a note.
They added that the "expectation of significant losses from the remaining loan book and weak operating income as a result of the challenging economic environment" had also contributed to the rating.
Bank of Ireland also retained its A-2 rating, but got a "stable" outlook reflecting Standard & Poor's "expectation that the Irish Government will remain highly supportive of Bank of Ireland (BOI), the announced capital raising will be executed successfully, and that the restructuring will proceed in line with BOI's stated expectations".