Yesterday’s deal on the Prom Notes has unambiguously positive implications for Ireland from both a fundamental and technical point of view.
Firstly, from a fundamental perspective, upgrades to Ireland’s deficit projections stretching into the medium term point to a more rapid achievement of fiscal consolidation targets than had previously been envisaged. This should serve to assuage some of the lingering concerns in the market about Irish debt sustainability.
From a technical perspective, Irish sovereign bonds will benefit from enhanced demand in the longer end of the curve from index extension, similar to what we saw last year when the government tapped the 2025 Treasury bond in settlement of a Prom Note payment.
The improved outlook arising from this deal also bolsters what we believe to be an already strong case for an upgrade to Ireland’s credit rating, which could prove to be another key catalyst for the curve.
For the NTMA, which has made an impressive start to 2013, raising a quarter of its €10bn funding target in the second week of January with a tap of the October 2017 bond followed by a T-bill sale that was launched at the lowly rate of 20bps, we believe that yesterday’s developments are very significant. We would not be surprised if the agency were to capitalise on both: (i) the improved outlook for the Sovereign on the back of this deal; and (ii) the technical factors noted above relating to index extension; and seek to launch a new 10 year or similar long-dated issuance in the near future.
Summing up, we believe this to have been as good a deal as could have been envisaged and would anticipate this to be reflected in improved market sentiment towards Irish government bonds.
For further information please consult our research note, which can be downloaded by visiting this link: http://www.ncbresearch.com/PDF_Archive/2013-02/Prom%20Note%20Deal.pdf
Philip O’Sullivan, Chief Economist.