Irish and Spanish bond sales underline move away from ‘periphery’

LONDON: Investors hoovered up Irish and Spanish debt through bond sales and in the open market on Thursday, underlining how the two countries are moving away from the "periphery", a phrase used to describe lower-rated and more volatile euro zone bond markets.

Even though political issues are clouding the outlook for both, with Spanish coalition talks rumbling on and an uncertain Brexit outcome hanging over Ireland, their debt has been in heavy demand in recent weeks.

And on Thursday, benchmark Irish 10-year bond yields hit their lowest since December 2017 at 0.491 percent while Spanish 10-year yields were near a 2-1/2 year low at 0.946 percent.

In addition, there was strong demand for long-dated debt sales from both countries.

Ireland launched a 2050 syndicated issue, and had received orders of over 17 billion euros by mid-morning.

Spain, meanwhile, sold 4.08 billion euros of debt of varying maturities including an October 2048 line.

"Good demand for these sales today confirms the favourable backdrop for issuance and also shows that the Spain and Ireland convergence with the semi-core has come a long way," said Commerzbank rates strategist Rainer Guntermann. "This is reflected in the improving ratings we have seen."

Ireland has had a single A rating from all three of the main credit ratings agencies for a while now, and Spain has more recently been upgraded into single A status by two out of the three; S&P Global and Fitch.

This represents an improvement from the days of the euro zone debt crisis of 2010-2012, when both countries needed euro zone bailouts and Spain teetered on the edge of a junk rating and Ireland dropped into the triple B ratings bucket.

As a result, an inconclusive Spanish election and questions over the Spanish deficit and the separatist issue in Catalonia has not been a barrier to investor demand for Spanish government debt.

Catalonia's former separatist leader Carles Puigdemont on Tuesday urged Pedro Sanchez, the winner of the parliamentary election last month, to be open to dialogue with the independence movement but declined to say if his party would back him in parliament.

Political issues are also rumbling away in Italy, where the leaders of the two parties in the coalition government, Matteo Salvini and Luigi Di Maio, have both raised the possibility of breaching EU rules on public spending.

Though Economy Minister Giovanni Tria ruled this out in a conversation with financial daily Il Sole 24 Ore, Italian bond markets have been jittery over the past two sessions.

Italian 10-year bond yields were up 5 bps in early trade at 2.66 percent, while the Italy/Germany bond yield spread was at 272 bps, having touched its widest level since February earlier this week.

In addition, US private equity fund BlackRock has decided to pull out of a proposed rescue of struggling Italian bank Carige, sources familiar with the matter said on Thursday.

This likely leaves the state on the hook for the ailing lender, putting upward pressure on yields as it could mean Italy will have to borrow more and thereby increase the supply of bonds.