Landmark bond auction success pins Irish yields at record lows

Thu Mar 13, 2014 8:27am EDT

* Irish 10-year yields fall to new record low below 3 pct

* Dublin's first debt auction since bailout finds strong demand

* Auction marks normalisation of Ireland's market access

By Marius Zaharia

LONDON, March 13 (Reuters) - Irish government bond yields hit new record lows on Thursday as Dublin's first regular debt auction since its 2010 international bailout found substantial demand and cemented the return of full access to borrowing markets.

Ireland sold 1 billion euros of 10-year bonds at a record low average yield of 2.967 percent - a lower premium than that offered by the bonds in secondary markets, where investors trade debt that has been already issued.

Demand was 2.9 times higher than the amount sold and came from "the full spectrum of investors," including pension funds and insurers, which tend to hold on to the paper for longer than banks and hedge funds, one trader in Dublin said.

"The results reflect very good demand," said Luca Cazzulani, rate strategist at UniCredit in Milan. "Ireland has gained a lot in investors' eyes, it has moved (away) from being perceived as a peripheral market."

At the height of the crisis in 2011 and 2012 Ireland was shut out of markets as many investors feared its property market crash could push the indebted sovereign to the brink of default.

But Dublin pushed through structural reforms swiftly, while the European Central Bank eased worries about the euro zone's future with its conditional promise in 2012 to buy a country's bonds if it got into trouble.

With the economy recovering faster than its peripheral peers, investors have bought heavily into the Irish success story in the past year and ratings agency Moody's restored the country's investment grade status in January.

"They have turned the corner," said Christoph Kind, head of asset allocation at Frankfurt Trust, a firm which bought back Irish bonds following the Moody's upgrade and remains "constructive" in that market.

Ten-year yields last traded 5 basis points lower on the day at 3.0 percent, having hit a record low of 2.981 percent at the start of the session. Traders said many investors have bought Irish bonds before the auction fearing they may not be able to get anything from the sale.

"There was a time when (demand only came from )... the domestic investors and one or two accounts in the U.S.," said one primary dealer in Irish bonds. "Now it's the U.S., Europe and Asia - it's gone pretty global."

Data showing a shock 2.3 percent economic decline in the fourth quarter had limited impact as it was offset by an upward revision of third quarter figures. Analysts said 2014 data such as falling unemployment suggest the recovery continues at a strong pace.


Ireland is already funded into 2015 as it has sold debt via syndicates of banks in 2013 and early in 2014.

It is resuming regular bond auctions partly to prove its return to business as usual. Debt auctions are considered the ultimate indicator of how safe a sovereign's market access is, as they rely on steady interest from a large pool of investors whereas in syndicated debt sales banks put more effort into rallying up bidders and have more time to do it.

"This return to domestic bond auctions is the final stage of Ireland regaining full access to capital markets," said Sandra Holdsworth, an investment manager at Kames Capital.

"One note of caution: at current levels of yield there is little margin to protect investors should the economic outlook worsen or fiscal discipline be lost."

Ireland's funding target for this year stands at 6-10 billion euros, with 4.75 billion already raised.

Italy also sold bonds on Thursday. It issued bonds worth 7.75 billion euros, paying record low yields on three- and 15-year debt, a day after new Prime Minister Matteo Renzi approved sweeping tax cuts to revive the economy.

Italian yields were 2 basis points lower at 3.40 percent, slightly above eight-year lows of 3.365 percent hit last week.

German 10-year Bund yields, the benchmark for euro zone borrowing costs, fell slightly to 1.59 percent.