November 23, 2012 / 5:06 PM / in 5 years

US investor's Irish punt casts large shadow

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 bond markets.

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 September.

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 EUR88.5bn.

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.

UNPREDICTABLE SWINGS

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 securities.

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.

SYNDICATED DEAL

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.”

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