Analysis - Price right for Ireland to step up market return

DUBLIN Mon Sep 17, 2012 3:04pm BST

DUBLIN (Reuters) - Ireland's debt chief said last week that its return to markets ahead of schedule means it can be choosy about future issuance but the price looks right for Dublin to step up its efforts and move swiftly towards exiting an EU/IMF bailout.

Ireland has taken full advantage of a dive in bond yields since July by restarting its treasury bill programme, launching a bond swap, issuing its first sovereign annuity bonds and raising 4.2 billion euros (3.4 billion pounds) in new long-term debt.

The flurry of activity, spurred on by the decision by euro zone leaders in June to look at easing Ireland's bank debt, has allowed Dublin to slice almost 10 billion from a 12 billion euros bond redemption which falls due just as its bailout cash runs out.

While further momentum would be generated if a more lenient bank debt deal was fleshed out by the end of the year, Ireland's debt agency is unlikely to wait that long to re-enter long-term bond markets with borrowing costs now on a par with Italy and comfortably lower than Spain's.

"The NTMA (National Treasury Management Agency) are doing a very good job at the moment of managing the momentum in Irish bond prices as they gradually re-engage with the bond markets," said Ryan McGrath, a bond dealer at Dolmen Securities.

"Because they are so cash rich and have more or less taken care of the 2014 funding cliff, they are not under any pressure but they also need to maintain their positive momentum."

The NTMA has said it plans to do so by introducing its first inflation-linked bond, looking at tempting more pension funds with its new annuity product and issuing T-bills on a monthly basis after seeing the cost of selling three-month paper more than halve last week.

This alone would likely fully take care of what's left of the January 2014 bond, the sole redemption due that year, as well as beginning to pre-fund well in advance the 10 billion euros that will be required to fund the 2014 budget deficit.

Yet with recent moves by the European Central Bank and German constitutional court pushing yields on Ireland's 2020 benchmark bond to a more than two-year low of 5.33 percent, most analysts think the NTMA will be far busier than that.

"I think it is definitely more likely than not that you will see a (long-term) issue from the NTMA in the next six weeks," said Donal O'Mahony, global strategist at Davy Stockbrokers, a primary dealer in Irish bonds.

"Private capital is invested in core, core, core but the authorities in Europe have effectively incentivised it to go back to what it should be doing, availing of some still extraordinarily wide spreads in a system that is now safe."

"ONLY MAKE SENSE"

Bond dealers see Ireland's new 2017 bond, a line introduced two months ago when Dublin raised long-term debt for the first time since September 2010, as the most obvious candidate to be tapped in the coming weeks.

One reason is that there is only 3.8 billion euros of the bond in issue, shy of the 5 billion considered to be benchmark size, meaning there is currently not enough supply to meet the increased demand in recent weeks.

A more compelling reason however is that the bond is now trading at 3.97 percent, the same level as Italian five-year paper and some way below both the 5.9 percent Dublin sold it at in July and even the pre-crisis level Ireland funded itself at.

"The 2017 bond issue is currently trading below the average cost of circa 4.65/4.70 percent of Ireland's pre-EU/IMF aid programme average funding costs. If you can issue five-year bonds at these kind of yield levels, it can only make sense," said Fergal O'Leary of Dublin-based Glas Securities.

While the NTMA have repeatedly cautioned that risks remain, not least around the simmering euro zone crisis, some dealers believe such a further foray into long-term markets could be a prelude to a new 10-year issue, a bold move that would banish any fears about Ireland needing a second bailout.

"Up until the recent run up my base case was that they would do a 10-year issue on the far side of Christmas but the way the yields have come off, you are suddenly starting to approach levels where it would be attractive," said Dolmen's McGrath.

(Reporting by Padraic Halpin, editing by Mike Peacock)