Irish Election May Mark a Good Time to Exit Country’s Bonds
Irish Election May Mark a Good Time to Exit the Country’s Bonds
(Bloomberg) -- Throughout all the political noise of Ireland’s knife-edge election, a fading rally for the country’s bonds is sending a signal to investors: it’s a good time to get out.
The debt has been the second-best performer in the euro area since Prime Minister Leo Varadkar agreed a Brexit breakthrough with the U.K. last October. While there may not be a big knee-jerk sell-off if this weekend’s vote results in a change of leader, investors are questioning whether near record-low yields now justify the risks.
The election was hanging in the balance Sunday, after an exit poll pointed to a virtual dead heat between Irish Prime Minister Leo Varadkar’s Fine Gael as well as the biggest opposition party, Fianna Fail, and Sinn Fein. That left investors guessing on a potential coalition. A clear picture of the final outcome is expected to emerge late Sunday or by around midday on Monday.
While Sinn Fein, which favors higher spending, isn’t running enough candidates to approach a majority, both Varadkar and the biggest opposition party have pledged not to enter government with it, leaving investors guessing on a potential coalition. And then there’s still an end-year deadline to agree a Brexit trade deal.
“I doubt the relative value will again improve very much,” said Henning Schnurbusch, a money manager at Cologne-based Monega Kapitalanlagegesellschaft, who was bullish on Irish bonds in 2019 but may reduce his long position in the near future.
A return to government for opposition Fianna Fail and its leader Micheal Martin would be fiscally more in line with the current administration. The party used to be a dominant player but lost power after the financial crisis led to street protests and an international bailout. Ireland is forecast to run a budget surplus this year and next, yet the European Commission sees doubts on the sustainability of its corporate tax revenues as a risk.
Market reaction to the election campaign has been muted so far. Irish 10-year yields have actually tightened their spread against German and French equivalents since a Monday poll showing Sinn Fein in the lead, showing investors are not pricing in event risk.
Brexit Risk
Still, Ryan McGrath, an analyst at Cantor Fitzgerald in Dublin, got plenty of calls from clients wanting insight into the election and its potential impact on Irish assets. He thinks it’s unlikely Sinn Fein will be in power after the election, and even if it does help form a new administration, the impact on the country’s finances may be small.
“In the Sinn Fein manifesto, spending plans, while greater than those of Fianna Fail and Fine Gael, are still conservative,” he wrote in a note to clients, also pointing out that the party’s Brexit stance was in line with the current Irish administration.
So far this year, the bonds have returned investors 1.7%, according to a Bloomberg Barclays index. Any nerves leading to a reactionary dip could create an opportunity to buy for Danske Bank A/S, given the bonds will still get support from the European Central Bank’s continued quantitative easing.
“We have Ireland as a top trade due to decent fundamentals, European Central Bank public sector purchase programme and reinvestment, and that the Brexit risk is a bit overdone,” said the bank’s chief analyst Jens Peter Sorensen. “So if Sinn Fein do well in the election -- and spreads widen on the policy uncertainty -- we would use this as a buying opportunity, as we have seen so many times before when spreads have widened on election results.”
However, most analysts share Schnurbusch’s view that the result may just keep Irish bonds around the level of their peers. Netherlands and France both offer similar yields to Ireland but without the same Brexit risks heading into a tough year of U.K.-EU negotiations. Any departure from the bloc without a trade deal would disproportionately impact the Irish economy.
Ronald van Steenweghen, a money manager at Degroof Petercam Asset Management, has moved to be underweight Irish debt. He believes Irish bonds’ end-of-2019 momentum has disappeared, and that they offer little short-term relative value.
“The market already prices in a fairly optimistic rating evolution for Irish bonds over the near-future,” he said. “I’d wait for any flare-up in Brexit risk to re-enter in Irish bonds.”
To contact the reporter on this story: Greg Ritchie in London at gritchie10@bloomberg.net
To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Neil Chatterjee, Michael Hunter
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