Business World

Thursday 23 January 2020

Markets no longer fear Irish bonds as investments but instead see opportunity

The main rating agencies, including Moody's, give ratings to sovereign and corporate debt for investors which 'prices' the attaching interest rate in the market
The main rating agencies, including Moody's, give ratings to sovereign and corporate debt for investors which 'prices' the attaching interest rate in the market

Ryan McGrath

As an investment class, bonds have never been more in the news than in the past two years.

First it was the crisis of 2010, when the shifts in "spreads" or "yields" in governments bonds were daily news, even if many were not fully aware of what any of that meant.

More recently, however, an upsurge in foreign appetite for new Irish debt has caught many domestic investors off guard.

For two years, Ireland was effectively "shut out" of bond markets. Having entered a bailout programme Ireland lost the trust of the investment community. But since the summer we have gradually been regaining investor confidence.

In July, the National Treasury Management Agency surprised the market when it successfully issued a new 5.5pc five-year bond, Ireland's first outright bond issue since September 2010.

So far in 2012, Irish bonds have outperformed their European peers. A well-managed bond market re-engagement programme along with potential European Central Bank bond purchases and Mario Draghi pledging to do whatever it takes to save the euro, have been responsible for the aggressive rise in Irish bond prices in recent months. In the past fortnight the situation has improved dramatically.

Bonds provide investors with regular income through annual interest payments in the form of a coupon.

Bonds tend to be generally less volatile than equities and often will not move in tandem with stock markets, helping provide diversification in an investor's portfolio.

Investors who are more concerned about safety rather than growth often weight their investments towards bonds. However, with less risk attached, bonds may not offer returns as high as stocks over the long term.

Professional credit rating agencies provide investors with an easy-to-follow scale about the risks attached to investing in bonds.

Most bonds have a credit rating attached which is a reflection of the general creditworthiness of the bond issuer.

Lower credit ratings result in higher borrowing costs because the borrower is deemed to carry a higher risk of default. Ratings are generally subdivided into two categories, investment grade and sub-investment grade.

The highest investment grade ranking is AAA, falling to BBB- , the investment grade threshold. Any bond rated BB+ or lower is considered to be high risk and below investment grade.

Bonds may vary regarding the minimum investment amount allowed. Sovereign bonds generally have relatively small minimum investment levels but some corporate bonds may only allow a minimum investment of €50,000. Similar to equities, bonds can be purchased at any stockbrokers.

Full-scale Irish sovereign bond market re-entry is not anticipated until quarter one of 2013 but Irish corporate bonds have led the way over the last two weeks. The ESB, Bord Gais, Bank of Ireland and AIB have all recently tapped international bond markets with unprecedented demand.

Earlier this month, the ESB successfully raised €500m by selling an investment Grade, 4.375pc seven-year bond where the company received €6bn in bidding interest.

Last week Bord Gais tapped into some of the overflow demand from the ESB issue when it sold a new €500m 3.625pc five- year bond. With almost €7bn in bidding interest the issue was nearly 14 times oversubscribed, adding further evidence of the markets' current appetite for Irish debt.

The demand came mostly from European money managers, with the UK and Nordic countries as well as France, Germany and Switzerland all represented.

Irish banks have suffered greatly from bond investor scepticism, with the "burn the bondholders" slogan becoming common rhetoric across the country.

However, even the banks have recently managed to move beyond investor reluctance by successfully issuing more complex covered bonds that provide collateral giving the buyer additional security.

Over the last two years Irish investors have mainly focused on foreign bonds. With the additional supply coming to the market Irish investors will now have a greater choice between international and domestic bonds.

The recent success of the NTMA, Irish banks and some Irish corporates in accessing bond markets has increased the visibility and profile of Irish issuers within markets. The shift in tone highlights how much has changed over the last number of weeks.

Previous discussions regarding haircuts to Irish debt have disappeared, investors do not have to be fearful of bonds as an investment and can once again start looking at them as an investment opportunity.

If, as expected, the NTMA can demonstrate regular bond market access next year, investors will have a larger suite of domestic and corporate bonds to fit their portfolios offering important diversification alternatives.

Ryan McGrath is a senior fixed income strategist at Dolmen Stockbrokers

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