Monday, 9 January 2012

Irish Bonds Tempt Buyers Again After Banks Blow Up: Euro Credit

Sheila Killian: There’s an interesting article on Bloomberg, by Dara Doyle and Cormac Mullen. Interesting, that is, in the Confucian sense of living in interesting times.

The initially rather bizarre gist of the article is that for potential bondholders, the banks that we have bailed out are now a far more attractive investment proposition than the Irish government which guarantees them. They are producing a higher yield, which is counterintuitive if you take the view that they have the same risk, since we are underwriting them.

Here’s a quote from the article:
“Essentially, you are getting more than twice the yield for the same amount of risk,” said Fergal O’Leary, a director at Dublin-based fixed-income firm Glas Securities. “The government bond is undoubtedly more liquid than the guaranteed bank security, but that just doesn’t justify the current scale of the yield premium.”

Indeed not. So what does? Well, perhaps the market, in its anthropomorphised all-knowingness doesn’t actually “think” they have the same risk. Perhaps it “thinks” that for some reason Irish bank bonds are riskier than Irish government bonds, despite the government’s willingness to guarantee them. Another quote, this time from a billion-pound fund manager based in the UK:

“I don’t see how they will be able to maintain that guarantee, or at least there’s a risk that they won’t, and certainly the chances of a default on the bank debt are significantly more than on the sovereigns,” Bathgate said by e- mail yesterday. “The risk return just doesn’t add up.”

So it looks as though investors don’t really believe that the government will ensure that all the bank bonds are repaid. It looks as though that might already be priced into the yields of these bank bonds. In which case, perhaps, we should look again at the unguaranteed bonds coming up later this month, and consider what’s really to be gained or lost, by paying them.

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