By Carmel Crimmins and Sinead Cruise and John Geddie
LONDON, Nov 23 (IFR) - US asset manager Franklin Templeton's
major holding in Irish government bonds could dissuade other
investors from buying debt issued by the country, and hinder the
Emerald Isle's ambitions of an imminent return to syndicated
The San Francisco-based investor's aggressive purchases have
helped Irish govvies become the best performers in the European
SSA space this year. But its holding of nearly one tenth of a
highly illiquid market leaves it - and other investors,
including the European Central Bank - exposed and left other
investors nervous about following its lead.
Other investors worry that if Templeton were to sell its
holding - either because it turned bearish, its own client
investors started to withdraw their cash from its funds or
simply because it wanted to take profits - the price of Irish
debt could tank.
"It will be like being in front of a train if they want to
exit the trade," said Gareth Fielding, chief executive of
Quantum Global Wealth Management, which specialises in asset
management for central banks and sovereign wealth funds.
"We all like to ride the trends but you don't want to be
last out of any position. And in this case, even if you were
second to book profits, the trade may have already moved
significantly against you."
So far, the US investor's Irish shopping spree has paid off,
both for it and Dublin. The yield on the benchmark 2020 bond has
fallen to 4.5% from 8.5% at the end of last year, helping
Franklin Templeton's USD64bn Global Bond Fund to earn a return -
on paper - of nearly 13% over a 12-month period to the end of
The asset manager holds around EUR8.3bn ($10.6bn) of Irish
paper, much of it acquired over the past year, traders estimate
using market data that puts Dublin's total debt stock at
Most of the purchases, they estimate, were made by funds
controlled by Michael Hasenstab, co-director of Templeton's
international bond department.
A company representative at Franklin Templeton declined to
confirm officially how much Irish debt the group holds across
its many individual funds. He also said Hasenstab was
unavailable for comment.
Hasenstab has said his investment approach is long-term and
his funds' exposures to smaller markets are not great as a
proportion of assets. He has also said his funds could quickly
hedge their exposures in the credit derivatives market.
Other overseas investors have bought into the Irish story,
particularly since the summer when Dublin successfully sold
five- and eight-year paper, its biggest test of market sentiment
since a crippling banking crisis forced it out of bond markets
in the autumn of 2010 and into an EU-IMF bailout.
"We have seen a lot of interest from the United States and
mainland Europe. It has really been those guys leading the
charge and forcing yields lower over the last few months," said
Owen Callan, senior dealer at Danske Markets, a primary dealer
in Irish bonds.
Ireland's sovereign bond market is the euro zone's least
liquid after fellow bailout recipients Greece and Portugal, as
evidenced by bid-offer spreads - partly due to the dominant
share of the paper now owned by Irish banks and the European
Central Bank ECB, none of which trades heavily in the
Ireland's central bank and local commercial banks hold
around EUR21bn of the bonds, central bank data shows, while the
ECB holds EUR15bn-EUR20bn, according to analysts. That leaves
Templeton sitting on at least 16% of the remaining bonds - a
scary statistic for other potential buyers.
Dublin is hoping to sell new debt products to appeal to
Irish pension funds, which are unusually small players in their
domestic bond market, holding only 0.5% of the paper.
But while pension bosses say they are keen, they are
troubled over how Templeton may use its holdings. "There has to
be concern about what happens if they decide to unwind that
position," said Jerry Moriarty, chief executive of the Irish
Association of Pension Funds.
Keen to attract new foreign investors, Ireland is also
preparing a syndicated bond issue for early in the new year.
Templeton's big holding may, however, put off buyers who fear it
could lead to unpredictable swings.
At fixed income investment manager ECM, Sohail Malik, senior
portfolio manager for the Special Situations team, suggested the
presence of such a large, private-sector bondholder left him
wary of the Irish market. "This kind of miraculous recovery in
the Irish yield curve has to be taken with a pinch of salt," he
said. "We think it is manufactured to a great degree."
Saying he had been approached by brokers this month offering
Irish bonds, he added: "That says to me that someone is very
long bonds and wants to start feeding them out to the market."