Investors pile in as Irish bonds are the hottest ticket in town
Published 22/11/2012 | 05:00
€2.5bn raised in eight days and €14.5bn more on offer – the markets are clearly indicating that this country and the eurozone have turned the corner, writes Donal O'Donovan
'WELL, it's not just one guy any more," bond market analyst Elizabeth Afseth said yesterday.
She made the comments to the Irish Independent after Bord Gais held the latest in a string of high-profile bond auctions that have seen Irish borrowers raise €2.5bn on the markets in eight days.
Even more staggering is the fact that those same borrowers turned down the opportunity to borrow a further €14.5bn.
This is something that nobody in this country has seen in half a decade. Few had expected to see it again and fewer anticipated this so soon after the financial collapse.
The "one guy", for anyone not paying attention over the past 12 months, is Michael Hasenstab, the California-based money manager at investment giant Franklin Templeton. His early and massive punt on Ireland means that he has become synonymous with this country's fate in the bond markets.
Mr Hasenstab was ahead of the pack on the Irish bond story and has been buying government bonds since June of last year. He is now reckoned to control €8bn, or 10pc of traded Irish government debt.
When he started buying the bonds, the yield – or interest rate – on Irish 10-year-government bonds was an eye-watering 14pc.
Most investors simply don't have the stomach for the kind of risk associated with that kind of reward.
Having stayed the course through the horrors of last year, Mr Hasenstab helped the National Treasury Management Agency (NTMA) force its way back into the markets last July and success has bred success.
The yield on the most watched Irish government bond is now 4.5pc. As Elizabeth Asfeth points out, Mr Hasenstab is no longer alone.
The proof of that became undisputable over the past 10 days. The ESB, Bank of Ireland, the NTMA and Bord Gais have all been able to sell massive new debt and pay increasingly low rates.
Six months ago, the markets were simply shut to those same Irish names.
Not only can they now borrow, but they are doing so from a widening pool of mainly European investors.
Some of the kudos for that goes to the NTMA and its unending PR offensive.
Bord Gais finance chief Michael O'Sullivan was unstinting in his praise for the agency yesterday after getting away his own €500m bond deal.
It is also happening because the euro area itself is finally starting to look secure.
For Investec's Asfeth, the turnaround is reminiscent of the early days of the euro itself.
"Europe is going out of its way to save Greece. If they'll do that for Greece, investors are assuming they would go even further for Ireland," she says.
This means that investors are comfortable making lending decisions that would have been unthinkable six months ago – as long as there was even the remotest threat that Ireland could be forced out of the euro.
"It's almost back to 1997, 1998 and the convergence trade," says Ms Asfeth.
That's a reference to the great levelling off in the borrowing costs as countries came together to create the euro.
As the risk of a break-up recedes, the process is being repeated, easing the impact of the 'de-convergence' that saw debt costs spiral in 2010 and 2011.
The other, and connected, driver behind the current surge in investor appetite has been European Central Bank president Mario Draghi.
Mr Draghi has turned on the taps by keeping interest rates low. He has been pumping ever more cash into the euro system since he took the helm in Frankfurt a year ago.
The flood of money has driven down the returns to be got by investing in core European markets, driving money managers to Ireland and other parts of the 'periphery' in a hunt for 'yield'.
This is exactly what Draghi hoped would happen and the effects are more obvious in Ireland than anywhere else.
The process is self-fulfilling. As the return to be had from buying German bonds comes down, investors have looked at Irish government debt. As those yields fall, investors have looked at Irish semi-states and banks.
As momentum builds, each new borrower coming to the market has found it easier and easier to raise funds.
Interest is coming from all over.
"I had a Korean firm looking to buy bonds yesterday for the first time in a long time," said Ryan McGrath a bond trader at Dolmen Securities in Dublin.
Like others in the market, he has seen a sea change in sentiment.
Many of his clients are investment firms who mark their performance against peers.
Investors who could live without Irish risk are being forced to look again, thanks to the big returns generated by early investors like Michael Hasenstab.
Funds that can't buy Irish government debt because the credit rating is too low are buying up bonds issued by the higher-rated semi-states.
None of the new investors will make the kind of money Mr Hasenstab has generated for his clients. That boat has simply sailed.
He began buying Irish government debt when everyone else was selling.
This is why his returns have been so dramatic. He is reckoned to have made €1bn for his investors through his wholesale backing of the Irish story.
Returns like that are a one-off.
His was a lonely move. Ireland had been reduced to "junk" status by rating agencies.
The economy was in free fall and the interest rate being charged for Irish bailout loans were so high that they threatened to smother any prospects of an economic recovery. The euro also seemed to be on the brink of collapse.
Those days are gone. On the home front, and on the wider economic front, the situation remains fragile. Growth is elusive, but the monumental risks that terrified investors in July 2011 now seem remote.
Ultimately, that's why it's not just "one guy" any more.