Cost of borrowing hits new low ahead of possible upgrade

Irish 10-year bond yields hit a record low of 1.99 per cent this morning, as market sources predict an upgrade for the Irish economy later today from ratings agency Fitch.

Austin Hughes, chief economist with KBC Bank, said the bond move is reflective of both the way the international environment is pushing towards lower rates because of weak recovery, and the extent that the Irish economy is showing momentum, with "fiscal metrics which almost look too good to be true".

“First and foremost it’s about global trends but there is also a strong sense that Ireland’s relative position is notably better and is likely to remain so,” he said.

Fitch is due to deliver its latest review of Ireland today, and may revise its ratings upwards. In a note this morning, Cantor Fitzerald said the Irish economy has made “substantial progress” and it “fully expects” an upgrade to A- later today.

Internationally, bond yields have continued to fall, with Japanese 10-year yields dropping 0.5 per cent over-night, and Germany’s 10-year yields dropped below 1 per cent yesterday for the first time on record.Borrowing costs in Italy also fell to all-time lows, while the rate on equivalent Spanish debt dropped to 2.427 per cent, also the least on record, as government bonds across the euro bloc headed for a weekly advance amid faltering growth and bets inflation will remain subdued.

With yields now at all-time lows, Pioneer Global Investments's Cosimo Marasciulo says this "is as good as it gets" for peripheral securities.

“Positive total returns across the market, low volatility, usually these kind of very benign market conditions do not last long,” says Marasciulo, who helps to oversee about $253 billion as head of European government bonds in Dublin. “There’s always a trigger that changes the overall picture.”

The extent of the rally means the market is already pricing in the positive story in the periphery, leaving Pioneer looking for opportunities to reduce its holdings, Marasciulo said. “We think that most of the rally is behind us,” he said. “We are neutral. If we see a catalyst we may consider an underweight” position, Marasciulo said.

Pioneer is not alone in seeing the surge in European bonds coming to an end. Goldman Sachs strategists last week said they didn't expect any further narrowing in periphery yield spreads over benchmark German securities, while Francesco Garzarelli, the firm's co-head of macro and markets research, said that German bund yields may double by the end of 2015.

(Additional reporting Bloomberg)