Bonds gain slightly as downgrade is not so severe

MARKETS:IRISH GOVERNMENT bonds advanced slightly yesterday as a Standard Poor's rating downgrade was less severe than the market had expected.

The yield on 10-year Irish notes fell below the 10 per cent mark, closing 0.24 per cent down on the day at 9.97 per cent, according to Bloomberg data.

Financial stocks received a mixed reaction on the Irish stock market. Bank of Ireland closed up 41 per cent at 31 cent, while Irish Life Permanent tumbled nearly 59 per cent to finish at 16 cent. Both stocks traded on heavy volume.

Trading in senior bank debt was “pretty frantic” yesterday, with hedge funds buying up senior bonds of AIB and Bank of Ireland, a bond trader with Dolmen Securities said.

“Some guys said they couldn’t keep up with pricing. It was flying all over the place,” he said.

This flurry of trading began on Thursday after Minister for Finance Michael Noonan’s speech in which he indicated that burden sharing would not be imposed on senior bondholders in the two main banks.

Heavy trading continued when markets reopened yesterday morning, but petered off about an hour before the close.

The investment research division of Citigroup predicted that Ireland would probably receive a 1 per cent reduction in the interest rate charged on its rescue package loans as a “quid pro quo” for not inflicting pain on senior bank bondholders.

“By not involving senior bank bondholders, the Irish Government has complied with demands from the European institutions, which regarded such a move as a big threat to financial stability for the euro area as a whole.”

Citi also predicted that the Government would not have to increase the country’s 12.5 per cent corporation tax rate as a pre-condition for the interest rate move.

However, it believes it likely that some measures to broaden the corporate tax base will have to be implemented.

Trading was not “massively” volatile in Government bonds, possibly because those who “play in the Irish Government space” are used to negative announcements by now, a Dublin trader said.

ING Groep NV said the SP downgrade was “excellent news” for bondholders as a larger cut had been expected.

“The stable outlook is a very good thing for a credit that has been under intense pressure,” Pádraig Garvey, head of developed-market debt in Amsterdam, said yesterday. “It’s good for holders of Irish paper.”

Nomura International predicted that Irish Government bonds would advance, particularly against Portuguese securities, following Thursday’s announcement on the amount of support Irish banks required. “Irish bonds look set to rally over the coming days on positive headlines,” Nick Firoozye, head of interest-rate strategy, and strategist Eleftherios Farmakis wrote in a research report yesterday.

However, Europe’s largest clearing house LCH.Clearnet, raised the margin requirement it charges on Irish bonds to 45 per cent from 35 per cent yesterday, making it more expensive to trade Irish debt. – (Additional reporting Bloomberg, Reuters)