Successful tap of the IRISH 3.4 03/24

The NTMA has today completed a successful tap of the 3.4 03/24 IRISH Treasury bond, raising €1bn from its first auction in three-and-a-half years.

The auction was completed at a yield of 2.967% (MS+113bps), which compares favourably with the MS+140bps at which the 2024 bond originally came at in early January of this year. Moreover, the spread over the German 10 year has tightened over that period from 159bps to the current 137bps.

This move reflects the normalisation of the agency’s funding moves, which has been facilitated by improving technical (being restored to investment grade by Moody’s on the 17th of January, which helped broaden the constituency of prospective buyers of Irish debt) and fundamental (the improving performance of the Irish economy, particularly on the domestic demand side) factors.

A strong response was expected from this auction. In intraday trading yesterday the Irish 10 year yield declined to a (then) record low of 3.019%. That the auction was completed inside the psychologically important level of 3% can be seen as a win for the NTMA. Moreover, the auction was 2.9 times covered.

In terms of the outlook for further new issuance, the NTMA has guided that it intends to raise “approximately €8bn” in 2014. Between today’s tap and January’s bond sale it has raised €4.75bn in the year to date, leaving c. €3.25bn still to be done. The NTMA has said that it plans to hold “one or two auctions per quarter…with indicative sizes ranging from €0.5bn to €1.0bn”. The agency will issue a statement at the beginning of April detailing its intentions for Q2.

Outside of new issuance, another near-term objective for the NTMA is to reduce the 2016 ‘funding cliff’ through either top slicing or offering a switch to holders of the 4.6% 04/16 bond (€10.2bn outstanding). With that bond trading at a chunky premium to par, we think a switch is more likely (although the negative carry on the NTMA’s €20bn of cash – that’s 12% of GDP – means that a top-slicing cannot be ruled out).

Looking further out, given where Irish yields are at, the NTMA is also likely to be considering refinancing some of the pricier Troika loans, which would further enhance the country’s debt sustainability.

So, a good result for the Sovereign today. While Irish bonds have had a very good run of late, our view is that they have further to run, with potential catalysts on the horizon (NB the next scheduled ratings agency reviews are May 16 for Moody’s; June 6 for S&P; and August 15 for Fitch) while in the background the newsflow continues to improve for the Irish economy.

Philip O’Sullivan

Investec