* Accounts lured by peripheral debt returns
* Rating agencies could provide further fillip
* Greece expected to return amid frantic demand
By John Geddie
LONDON, Jan 10 (IFR) - Frantic investor demand for
peripheral European government debt is set to continue unabated
in the weeks ahead, say market participants, after a series of
new debt issues from some of the zone's most fragile economies
were hoovered up this week.
Ireland, Portugal, and Spain
all made impressive starts to their 2014 funding
programmes this week, as investors looked to restock their
inventories with peripheral debt products that have
significantly outperformed equivalent core European paper over
the last year.
"We have taken a bullish view on the periphery for the last
few years, in contrast to many others. Now, it seems, this view
is becoming consensual among investors," said Mark Dowding,
co-head of investment grade at Bluebay Asset Management.
Spanish and Irish government bonds both made total returns
of over 11% last year, while the German and French equivalents
left investors with negative returns of minus 2.1% and minus
0.5%, respectively, according to research by Citi Bank.
"Investors can't afford to be underweight these markets, as
their overall performance will suffer," said Philip Brown, head
of SSA origination at Citi Bank.
This latent demand was evident when Ireland launched its
first new debt sale on Tuesday after exiting its EU/IMF bailout
last month, when more than 400 investors placed orders worth
around EUR14bn for the 10-year bond issue.
Two days later, Portugal - which is still to be weaned off
its official sector aid - received orders from 280 accounts
amounting to more than EUR11bn for its five-year bond tap.
Yields on 10-year Irish debt have rallied nearly 20bp since
the start of the year to hit lows of 3.28% on Tuesday, while the
Portuguese equivalents have rallied over 80bp over the same
period, hitting lows of 5.46% on Wednesday.
Investors remain confident this impressive rally is here to
"The peripheral trade definitely has further to run, you
just have to look at where it is trading versus corporate credit
or emerging market sovereigns for evidence of that," said
Dowding at Bluebay.
By comparison, French food retailer Casino, which is
clinging on to its investment grade rating, has a 10-year bond
bid at 3.16%, according to Tradeweb, while Russia, Baa1/BBB/BBB,
has a seven-year euro deal which hit tights of 3% this week.
The number of investors now focused on peripheral European
paper is undoubtedly growing, and if rating agencies take a more
positive view on these countries in the coming weeks, the trend
could accelerate, say strategists.
Moody's announces its decision on Portugal's credit standing
later on Friday, while S&P will offer its verdict on the country
next Friday. While many market participants say an upgrade of
Portugal's junk status is unlikely, they expected both Moody's
and S&P to raise their outlooks.
The big mover, however, will be Moody's verdict on Ireland
next week, especially as it is the only one of the three main
agencies still to rate Ireland sub-investment grade.
"We're pretty much on the cusp of an upgrade for Ireland,"
said Matthew Cairns, a senior credit strategist at French
investment firm AXA.
"Once Moody's lifts Ireland back to investment grade, there
is potentially a flood of investors that have been restricted in
investing in Ireland because of its junk rating."
Any increase in the number of investors competing to buy the
debt of these countries will only serve to reduce their
borrowing costs relative to core countries.
The spread between Spanish and German 10-year borrowing
costs was as wide as 465bp in the middle of 2012 as the market
began to fear Spain would be the latest country to require a
Following solid demand for Spain's auctions of a new
five-year bond and tap of a 15-year note on Wednesday, that
spread fell to 174bp, and Bluebay's Dowding expects it to hit
150bp over the course of the coming quarter, heading back to
levels not seen since 2010.
Market sources say Spain is planning to capitalise on demand
for its paper by issuing a new 10-year bond via syndication,
possibly as early as next week.
Rampant demand has led many market participants to speculate
that even Greece may be able to fulfil its ambition to return to
markets in 2014, just two years after it forced investors to
take a haircut on their holdings as part of a restructuring.
"It would be good for Greece to have a shorter dated bond,
so if international investors want to dip their toes back into
Greece there is something shorter than 10-years," said Brown at
Yields on 10-year Greek bonds hit 7.60% on Wednesday, levels
not seen since just after its first bailout in May 2010.