Business World

Thursday 26 April 2018

ECB is riding shotgun as bond markets assess risk

Donal O'Donovan

Donal O'Donovan

GREED and fear are, as ever, the prime movers for bond investors struggling to price risk amidst almost unprecedented market uncertainty.

Crisis in Japan, chaos in the Middle East and the unpredictable machinations around the European debt crisis make it harder and harder to assess risk, and ultimately to price bonds.

Yesterday, Portuguese bond yields dropped to the lowest level in a month, but only after the European Central Bank (ECB) moved to support the beleaguered nation's debt.

Portugal's high borrowing costs push the country ever closer to accepting a bailout deal similar to Ireland's. The government is resisting such a development and yesterday's intervention may buy some extra time for the country to try to win over private sector investors, but the big price move shows it caught those same investors off guard.

Portugal's 10-year government bonds dropped from 7.5pc to 7.2pc in a single trading session yesterday. Traders said the yield dropped to the lowest level since February 18 after the ECB bought Portuguese government bonds.


The yield on 10-year Irish government bonds also fell, dropping from a high of 9.6pc to end the day at 9.35pc.

It was a rare piece of good news for the two borrowers, but highlights again the reluctance of the private sector to buy risky bonds.

Yesterday, the head of Europe's biggest investment fund said his fund bought Spanish and Italian bonds last year.

Yngve Slyngstad is the CEO of Norway's oil-rich state pension fund. He said peripheral European countries still faced "significant challenges" related to their government debt.

The comments were made at a conference in Oslo. They will boost efforts by Spain in particular to avoid association with distressed borrowers including Ireland.

Norway's oil funds are major investors in the bond markets, but, like most bond investors, prefer low-paying, safe investments than risky bets.

Irish bank bonds fall firmly into the latter category, according to Hank Calenti, an analyst at Societe Generale in London.

He said senior bondholders of Irish banks risk of being forced to accept losses after European leaders refused to reduce the interest rate being charged to Ireland under the bailout deal.

Mr Calenti said burden sharing, with banks' senior bondholders forced to accept losses, could be the government's "wild card" at next week's summit of European Union leaders.

"For this reason we advise the very risk-averse investor to avoid all Irish senior unsecured and all subordinated debt," Mr Calenti said in a note to investors.

However, investors, like hedge funds, that are better able to take risks could find good value in the Irish bank bonds.

Mr Calenti recommended senior Anglo Irish Bank bonds due to be repaid in under six months and AIB bonds falling due over the next year as a potentially rewarding, if risky investment.

Bond traders said there was good interest from US investors in senior bank bonds yesterday, after the note was published.

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