Wednesday 22 November 2017

Interest in long-term government debt picks up despite default risk

Donal O'Donovan and Thomas Molloy

The past week saw a pick up in interest from US investors wanting to buy Irish government bonds, including debt not due to be repaid until 2020 and the 2025.

Dolmen Securities bond trader Ryan McGrath said investors have sold bonds due to be repaid in less than two years and some much longer-term bonds.

Investors buying long-term government bonds could be seen as a vote of confidence, but Mr McGrath is careful not to overstate the trend.

"I think these are value investors who see buying government debt at 70pc of face value as a good bet, even if there is a default," he said.

Investors stand to pick up 9.5pc yield plus a 30pc capital gain if the bonds are repaid on time, and think that any haircut would be less than 30pc in a worst-case scenario.

The renewed interest in buying Irish bonds is seen as positive, however.

"Two or three weeks ago nobody was looking at 2025 bonds, now there are buyers at the right price."

Irish 10-year bond yields finished last week lower with the 10-year yielding 9.35pc, but this rose to 9.44pc yesterday in line with a weaker market.

"The new Government is a bit of an unknown for investors too, and the change in tone from Ireland seems to be having some effect," said Mr McGrath.

Meanwhile, in share contrast, a new survey from Barclays Capital showed that investors increasingly believe Ireland and other highly indebted countries will be forced to restructure or default on their debts.

"Fifty percent of investors believe Greece, Ireland and Portugal will restructure/default within the next three years," said Piero Ghezzi, head of economics, emerging markets and FX research at Barclays Capital.

More than half of investors expect restructurings to spread beyond Greece to other nations such as Portugal and Ireland, according to the survey of 1,000 money managers, hedge funds, proprietary traders and corporate trading desks.

Just 2pc of those surveyed expect this to lead to a break-up of the eurozone.

"Investors increasingly believe that the endgame will be restructuring or default in the eurozone," said Barclays Capital's Mr Ghezzi.

The Barclays Capital survey also found the majority of institutional investors (60pc) believed the biggest change in the investment outlook since December had been the political upheaval in the Middle East and North Africa.

This contrasts with the 18pc of investors who believed inflation and potential policy normalisation in advanced economies were the main market developments since the last quarter.

When asked about the most underpriced risk in financial markets, the investors cited a hard landing in China above developments in the Middle East and North Africa.

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