Sunday 21 January 2018

Investors urged to switch strategy on government bonds


Donal O'Donovan

INVESTORS who own Irish government bonds should consider switching to government-guaranteed bank bonds instead, according to Dublin-based broker Davy.

Yesterday Davy became the latest broker to advocate the strategy, identifying up to 5pc of extra returns available if investors buy bonds issued by Anglo Irish Bank, Bank of Ireland and AIB that are guaranteed by the government, than the return available on state debt.

"We think accounts should be looking at selling the sovereign at current levels and buying up the ELG paper which is yielding some 500 basis points over the sovereign for some of the 2015 issues," said Eamonn Reilly, a bond trader at Davy, in a note to clients today.

ELG paper refers to the Eligible Liabilities Guarantee (ELG) programme, the State's bank guarantee plan.

In September Dolman Securities bond trader Ryan McGrath advocated a similar strategy.

Traders say the state guarantee means ELG paper and ordinary government bonds share the same risk of not being repaid. It means the extra "yield" or return should offer compelling value.

However the price paid for government bonds in the market is at least partly influenced by the European Central Bank policy of supporting the market for government debt by buying bonds issued by states; that support is not there for bank bonds, even for ELG bonds.

The market for government bonds is also bigger and more liquid than the bank debt market, which means investors are less likely to be caught on the wrong side of a sell-off.

In many cases investors are also sceptical that guaranteed bank bonds really are as well- secured as more straight forward government debt.

Irish Independent

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