October 11, 2019 / 3:37 PM / 9 days ago

Irish bonds rally as Brexit deal hopes rise but safe-havens suffer

LONDON (Reuters) - Irish government bonds rallied on Friday, outperforming their euro zone peers on hopes that a Brexit deal was now in sight.

An agreement that would help Britain leave the European Union in an orderly fashion could still happen, Irish Prime Minister Leo Varadkar said on Thursday, after what he called a very positive meeting with British Prime Minister Boris Johnson..

The European Union’s Brexit negotiator Michel Barnier, meanwhile, had a “constructive” meeting with his British counterpart Stephen Barclay on Friday, a spokeswoman for the bloc’s executive said.

The discussions stoked optimism across financial markets, with the pound notching up its biggest two-day rally since the Brexit referendum in June 2016.

JP Morgan said it now expects Britain and the EU to reach a withdrawal agreement, which would govern the two sides’ future relationship on matters such as trade, while Deutsche Bank said it was now more optimistic on Brexit.

Close trade links between Ireland and Britain mean the Irish economy has been viewed as vulnerable in the event of a no-deal Brexit.

As fears subsided on Friday, Ireland’s 10-year bond yields tumbled as much as 10 basis points. They were last down 5 bps at 0.04%, outperforming euro zone peers and set for their biggest one-day fall in almost three weeks.

“Bond markets are basically responding to the positive news in the UK,” said Pooja Kumra, rates strategist at TD Securities. “I think generally if you get the deal done, it should be supportive of Irish bonds ... “

Outside Ireland, 10-year bond yields across the bloc rose 4-5 bps as Brexit deal hopes and optimism over U.S./China trade talks dented safe-haven markets.

The German 10-year yield rose to its highest in almost 2-1/2 months at -0.427% and was set for its first weekly rise in a month. British and U.S. bond yields also soared.

U.S. and Chinese negotiators wrapped up a first day of trade talks in more than two months on Thursday. Business groups hoped the two sides might ease a 15-month trade war and delay a U.S. tariff increase scheduled for next week.

U.S. President Donald Trump said he would meet with China’s top trade negotiator, stirring hopes of an agreement.

“A bad mood and pessimism has been entrenched for so long due to Brexit and the trade tensions,” said Frederik Ducrozet, strategist at Pictet Wealth Management.

“Irish officials have raised expectations for a deal and if you get a path to a deal, there could be a massive squeeze in rates going higher and a re-steepening of yield curves.”

Suddenly brighter prospects for Brexit and trade talks eased concern about global growth prospects, prompting investors to unwind bets on near-term interest rate cuts from the Bank of England and European Central Bank.

ECB President Mario Draghi meanwhile continued to urge euro zone governments to boost spending; he said the bank could raise interest rates sooner if they loosen their own purse strings to support the economy.

Reporting by Yoruk Bahceli and Dhara Ranasinghe; Editing by Pravin Char and Kirsten Donovan

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