The longest bond rally since 2005 is making Irish securities too expensive for some investors just as the State begins to rely on their money again.
The extra yield, or spread, over German bunds slid to a three-year low this month as Ireland moved closer to exiting the €67.5 billion emergency aid programme it took in November 2010.
Goldman Sachs and BlueBay Asset Management are among the financial companies judging that the yields are now too low for a country that is barely growing and still with a debt load bigger than its economy.
"With the spreads where they are now, we think there are better stories, better places to invest," said Russel Matthews, a fund manager at BlueBay in London, which oversees $56 billion and has been putting money into Portuguese and Slovenian bonds.
“We are positive on the story, but from a valuation perspective we don’t think it’s that exciting.”
Ireland's 10-year borrowing costs tumbled to 3.53 per cent yesterday from a euro-era high of more than 14 per cent in July 2011. That compares with 6.71 per cent for Slovenian bonds and 6.17 per cent for Portugal, whose government is aiming to follow Ireland and leave its own bailout programme next year.
Deutsche Asset and Wealth Management, which oversees $1.24 trillion, reduced its Irish holdings after the rally, even as it remained positive on the outlook for the country, Oliver Eichmann, head of euro fixed income at the company in Frankfurt, said in an email yesterday.
The spread on Irish securities over bunds narrowed to 1.69 percentage points on October 17th, the lowest since April 2010, according to data.
The rally has also pushed Irish yields below those of Italy and Spain. "We currently view Irish bonds as expensive," Goldman Sachs analysts Francesco Garzarelli and Silvia Ardagna wrote in a note to clients last week. "The market has taken a constructive view on upcoming developments" regarding the State's return to bond markets, they wrote.
Technical analysis based on how Irish bonds have performed compared with peers supports that view. The 14-day relative strength index for 10-year Irish securities reached 83.9 last week, the most since April. It has been above 70, a level that signals it has climbed too much, for 20 consecutive days. The gauge was above 70 for 10 consecutive days ending May 10th – before the yields climbed more than 50 basis points in the following two months.
– (Bloomberg)
