State’s five-year borrowing costs hit record low on rating upgrade

The State’s five-year borrowing costs fell to a record 92-year low today on the back of Moody’s decision to restore Ireland’s credit rating to investment grade.

Yields on five-year Irish bonds dropped 17 basis points to 1.621 per cent at one stage, lower than equivalent US yields, as investors anticipated further upgrades in the coming months.

Yields on benchmark 10-year Irish bonds fell 20 basis points to 3.24 per cent, close to an eight-year low.

Moody’s upgrading of Ireland’s credit rating by one notch to Baa3 on Friday, the lowest investment grade, meant investors previously restricted from buying junk-rated debt were once again able to buy Irish bonds.

Yields on Irish debt have fallen steadily since mid-2011, at the height of the euro zone debt crisis, when five-year Irish yields topped 18 per cent, and ten-year yields were 14 per cent.

Welcoming the positive market reaction, National Treasury Management Agency (NTMA) chief executive John Corrigan said the agency still had about €4 billion to raise this year, though the size of the individual auctions would be “modest”.

Mr Corrigan said he hoped Ireland may benefit from a further rating upgrade, possibly within 15-18 months if the Government stuck to its fiscal targets, and that Friday’s decision by Moody’s may bring interest in Irish bonds from Japan and the Far East.

He also indicated to RTÉ’s Morning Ireland programme that the agency intended to make an announcement regarding its auction plan for the year in a week or two.

Despite an EU-wide bond market rally today, which saw yields on German bunds fall to a six-week low, the premium investors require to hold Irish debt over German debt shrank to 152 basis points - its lowest level since early 2010 several months before the country was forced to seek an international bailout.

“Ireland has clearly turned a corner and you’re starting to see that reflected in the ratings,” said Allan von Mehren, the chief analyst at Danske Bank.

“We’re going to see a continued grind lower in yields in peripheral countries as investors look for places where they can get yield pick-up and as long as fundamentals are also improving,” he said.

Citigroup strategist Peter Goves said that the rating action came earlier than anticipated and goes beyond expectations. He said Irish bonds may now gravitate toward the “soft core” of euro zone more quickly than anticipated, and suggested another Moody’s upgrade later in 2014 was a possibility.

Standards and Poor’s and Fitch rate Irish debt three notches above junk at BBB+. S&P lifted its outlook to positive last year while Fitch, scheduled to give an update in a month’s time, has a stable outlook.

“Ratings agencies are catching up with reality,” said Chris Scicluna, head of economic research at Daiwa Capital Markets. “Yields are still closer to the periphery (than top-rated states) so you can’t argue the rally is excessive.”

“Bottom line, the Moody’s move on Ireland was overdue but is still an importantconfirmation of the market discount, and especially as the market is discounting more positive developments,” said Padhraic Garvey, global head of developed markets debt & rates strategy at ING Bank in Amsterdam.

Mr Garvey noted that ING’s own credit rating model pitches Ireland at BBB+, and thus suggests that Moody’s is “still behind the pace”.

The cost of insuring against an Irish default also fell today. Five-year credit default swaps broke below 100 basis point for the first time since 2008, to 93 basis points, according to Markit.