Tuesday 24 April 2018

NTMA weighs up options on medium-term bonds

ECB president Mario Draghi
ECB president Mario Draghi

Dara Doyle

Ireland's redemption needs at the end of the decade produce potential opportunities for dollar and inflation-linked bonds, according to Frank O'Connor, director of funding and debt management at the NTMA.

"While supply is limited it is difficult to look at other products but we would see inflation-linked and dollar bonds being part of our portfolio of debt in the medium term," O'Connor said, speaking in Dublin on Friday. "You would be looking at 2019, 2020 or perhaps the latter part of 2018."

Ireland has about €48bn of debt maturing in the three years through 2020. Ireland's bond yields have plunged in recent years, in part because of an improving economy and in part because of the European Central Bank's quantitative easing program.

"Having already made a considerable improvement to our maturity profile we have no particular bias to only issue longer bonds," said O'Connor. "Rather, we will monitor market developments and investor appetite."

"On inflation-linked bonds, you could do one and tap it over time but we would probably like to do a couple of maturities, if we have the capacity," he added.

Euro-area sovereign bonds rose last week amid speculation that prospects of a prolonged period of low or non-existent inflation will support prices just as debt sales decline relative to repayments by governments.

German 10-year bunds pared their first weekly decline in a month as oil prices fell for a third day.

Still, Spain's securities were set for gains relative to Germany's this week even as inconclusive elections in December have left political parties struggling to form a government. Demand for Italian bonds was buoyed as €16.2bn of five-year notes matured on Friday, while Ireland is scheduled to repay €7.3bn of debt on April 18.

The rally in the region's bonds was disturbed last week as France sold debt via banks, including bonds maturing in 50 years, and data released on Thursday showed the inflation rate in the currency bloc last month was revised higher to zero, compared with economists' median prediction of a 0.1pc drop.

A gauge of future inflation signals that the European Central Bank, which is buying €80bn of bonds a month via its asset-purchase program, is still far from meeting its goal of an annual rate of just under 2pc.

That's giving bond bulls confidence to wager that this week's sell-off was not a repeat of the buyers' strike which was seen after Germany's 10-year yield dropped to a record in April last year.

"Going into the next couple of weeks, the balance will shift and we expect strong negative net supply to drag real yields down markedly," wrote BNP Paribas SA analysts led by Laurence Mutkin, London-based head of Group-of-10 rates strategy, in a client note.

"We retain a bullish call in core European government bond markets beyond the next couple of days and expect curves to flatten."

Germany's 10-year bund yield fell four basis points, or 0.04 percentage points, to 0.13pc. The 0.5pc security due in February 2026 rose 0.345, or ¤3.45 per ¤1,000 face amount, to 103.59. The yield climbed four basis points this week, its first increase since March 11.

Spain's 10-year bond yield was little changed at 1.51pc on Friday. That left the yield difference, or spread, to German bunds at 137 basis points, compared with 143 on April 8. Italy's 10-year securities yielded 1.34pc, with the gap to bunds at 121 basis points, versus 122 a week earlier. Brent crude oil futures dropped 2.6pc, retreating further from a four-month high reached on April 13.

The five-year forward inflation-swap rate, which gauges price-growth expectations, and which ECB President Mario Draghi has cited to justify monetary easing, was 1.40pc, the lowest closing level since March 1.


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