“Ireland is looking to issue about €8 billion this year, and yesterday’s issue of €3.75bn means it’s about half way done,” said David Tan, who is the head of the global rates team in the global fixed income, currency & commodities (GFICC) group at JP Morgan Asset Management (JPMAM).
He added: “It’s sitting on cash – yesterday’s issue was actually pre-funding for 2015. I think there are good reasons to be optimistic about Ireland. We as a firm participated in [yesterday’s] bond issue.”
Public Finance Hole
The credit crisis had left a large hole in Ireland's public finances, but under the terms of the bailout the government imposed budget cuts and tax increases to help fill it. A relatively bright economic outlook has also helped Ireland win favour with investors.
“We’ve seen good progress in terms of reforms and competitiveness,” said Tan. “Ireland can be viewed as a prime example of how structural reforms coupled with fiscal austerity can work. We’ve increased the overweight we’ve already had for about a year.”
EU Outlook Improved
Tan believes Ireland is a good model for other peripheral European countries to follow. “Spain is not far behind. It’s also quite studiously pursued structural reforms and cost competitiveness. The laggards are probably Italy and Portugal but all countries have made improvements. The outlook for [European] peripherals as a block remains pretty positive. I also think the European Central Bank will ease again at some stage this quarter, which will be positive.”
Bryn Jones, fixed income investment director at Rathbones, said he believes a general eurozone bond rally, including Ireland, has been driven by the European Central Bank being able to maintain and anchor down yields on German bunds. Portugal, Spain and Italy have all seen their bond yields fall this year.
“The key thing is [eurozone countries] have been able to create growth in a low inflationary environment,” said Jones. “This low yield environment does support consumption.” He does, though, point to a potential tipping point as companies take advantage of a cheap cost of funding to increase leverage. “Leverage in US high yield companies is now higher than before the crisis. The ECB may need someone with guts to do something.”
Still Risky
Jones is less bullish on Ireland than Tan. He held Irish government bonds last year in anticipation of the country exiting the bailout programme, but said that story is now largely played out. “We’ve also played some of the large ‘too big to fail’ Spanish and Italian banks like Santander and BBVA, but that’s also coming towards the end. There’s a bit more to go but there are still risks with investing in these economies.”
Despite some of the opportunities thrown up by peripheral European government and corporate bonds, Jones believes fixed income managers will find the going tough this year. “It’s a hard game to play. It’s hard to cut out risk because you’re giving up yield, and if you go in to cash you get nothing.”
