Irish borrowing costs were little changed in early trading on Monday after the Fine Gael-Labour coalition lost its majority in the general election on Friday.
The yield on 10-year bonds fell slightly below 0.9 per cent, in muted trading. There was a small decline in the long-term bond interest rate in early trading, by 11.30 am as European markets reacted to new euro zone inflation figures.
Market analysts expect that the uncertainty following the election is likely to lead to some underperformance by Irish government bonds compared to core European bonds in countries such as Germany. A number reported a flow of inquiries this morning from UK and European investors, asking about the political and economic implications of the result.
“ There has been a muted response so far” said Ryan McGrath of Cantor Fitzgerald in Dublin. Bonds yields could move higher compared to other markets if the uncertainty following the election is prolonged, he said. However investors would note that both Fine Gael and Fianna Fail, the two largest parties following the election, would both be likely to pursue “ market friendly” policies, even if it was yet unclear whether the two would come together to form a government.
Commenting on Monday, Philip O'Sullivan, an analyst with Investec said: "from a market perspective, we expect that the uncertainty is likely to see Irish sovereign yields underperform their (particularly core) Eurozone peers on the back of this, while there may also be implications for the Irish banks if the lack of a working majority for the government results in changes to the timeframe for a sale of some of the State's remaining interests in the sector." This refers to the planned sale of 25 per cent of AIB, which had been expected to proceed later this year, after the election.
Irish bonds will continue to lag European peers until there’s more clarity on the political outlook after Ireland’s election provided no clear winner, Danske analyst Pernille Bomholdt Henneberg writes in client note. He noted that both Fine Gael and Fianna Fail appeared to be resisting a move to a full coalition.
The yield on Ireland’s 10-year bonds has fallen below 1 per cent from 14.2 percent at the height of the financial crisis in 2011. However, the spread between benchmark bonds and German securities of a similar maturity has increased in recent days to 76 basis points from 44 basis points six weeks ago, as uncertainty mounted over the election. This trend of a gradual widening with core markets may continue if uncertainty builds in the weeks ahead, analysts say.
Ratings agency Moody’s said while it would be closely monitoring the formation of a new coalition, its main focus would be on the fiscal policy that the next government would be likely to pursue.
“Ireland’s public finances have improved considerably over the past few years. However, bringing its debt levels in line with higher-rated peers will depend on the ability to sustain a reasonably rapid pace of fiscal consolidation. The authorities continuing to commit to a strong pace of fiscal consolidation would remain positive for Ireland’s Baa1 rating,” said Kathrin Muehlbronner, senior vice president and lead analyst for Ireland at Moody’s.
Iseq index
Elsewhere, the Iseq index of leading shares was also broadly unchanged, following the inconclusive election result. It was down by just 24.54 points at 11.30am to 6.215.75.
Insurer FBD, which on Monday announced a pre-tax loss of some €84.8million, was up over 5 per cent to €6.60 as it said that business stabilised in the second half of the year and revealed a number of changes at board level. Other moves on the index included Glanbia, up 1.5 per cent to €18.31.
European shares retreated from a three-week high on Monday and were on track for their third-straight month of losses as a weekend meeting of the G20 group of leading economies failed to strike new, concrete measures to boost growth.
The Group of 20 finance ministers and central bankers declared on Saturday they needed to look beyond ultra-low interest rates and printing money to shake the global economy out of its torpor, with a communiqué flagging a series of risks to world growth, including volatile capital flows and a sharp fall in commodity prices.
The pan-European FTSEurofirst 300 index was down 1 percent in early trading after ending 1.6 per cent stronger on Friday. It has fallen more than 4 percent this month and is on track for its third-straight month of losses.
Additional reporting: Reuters
