Sunday 18 February 2018

Irish bonds will suffer due to referendum, traders say

Vote introduces 'an event risk previously discounted as unlikely' and will inject nervousness into markets

A referendum on the EU Fiscal Compact could have a negative impact on Irish government bonds
A referendum on the EU Fiscal Compact could have a negative impact on Irish government bonds
Donal O'Donovan

Donal O'Donovan

TRADERS say Irish government bonds will suffer, at least in the short term, after the Government announced a referendum on the EU's 'Fiscal Compact'.

The news makes an imminent return to borrowing in the bond markets unlikely, the traders said last night.

A spokesman for the National Treasury Management Agency (NTMA), which manages the national debt, declined to comment.

"This introduces an event risk that had previously been discounted as unlikely, so will inject some nervousness into a market," said Donal O'Mahony of Davy Stockbrokers.

However, he thinks that in the longer term the bonds will continue to recover.

The 'yield' or cost of borrowing on Irish bonds due to be repaid two years from now started to rise immediately after Taoiseach Enda Kenny told the Dail that a referendum will be held.

The rise was small, but traders expect further rises today.

Prices are now expected to remain volatile until at least after the referendum is held.

It comes after a long period of good news in the bond markets that has seen Irish bonds outperform their peers, thanks to confidence among international investors that the country is on track to recover from the crisis.

Even with a referendum the outlook is mixed.

Today sees the second round of the ECB's Long-Term Refinancing Operation (LTRO) that will pump vast amounts of cheap loans into eurozone banks.

It's good for bond prices because many will use the cash to buy the government debt.

"There will be conflicting forces in the markets today -- you have cash from the ECB that will support the bonds, but then you have the uncertainty of the referendum," said Ryan McGrath, a trader at Dolmen Securities in Dublin. Still, he thinks the Government was now unlikely to attempt to re-enter the bond market until after a referendum because of the extra uncertainty it added to the 'Irish story'.

It's a contrast with January when the NTMA used the earlier LTRO to convince banks to swap some of their existing Irish bonds for bonds due a year later.

It was a coup for the Government and the NTMA has been out meeting investors ever since. Many investors expected a repeat when the second round of ECB cash is launched today. That is now seen as unlikely.

There was better news earlier in the day, when €3bn was raised from investors for the Irish bailout. The European Union borrowed the cash in the markets on behalf of the European Financial Stabilisation Mechanism (EFSM).


The fund is one of three lenders to Ireland under the bailout, along with the European Financial Stability Fund (EFSF) and the IMF. The cash is due to be paid back in 20 years and was borrowed at an interest rate of just 3.375pc.

It will be loaned on to the Government here at no additional cost.

The money was raised in just two hours from 120 institutional investors, mainly European.

Despite speculation in recent months that Chinese and Japanese investors are the best hope of support for the euro bailouts, just 3pc of bonds went to Asia.

In contrast, almost half went to investors in Germany and Austria and 30pc to the UK and Ireland.

The cash is due to be handed over to the Government on March 5, following the next review by the troika.

Irish Independent

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