Ireland’s government bond market is one of the smallest amongst the Euro-11 countries, and consequently Irish Gilts represent only a tiny fraction of the typical global benchmark Indices. For many European Government bond managers, that effectively rules out investment in Ireland. For the larger funds, the main ‘problem’ of investing in Irish Government bonds is the lack of liquidity and the absence of a complete yield curve.
According to one Dublin-based bond manager, who declined to be named, EMU has brought about dramatic changes in the Irish bond market. He explains, “Many of the domestic Irish investors have moved out of their own market because their benchmarks have changed to EMU Government Bond Indices and so having been 100% in Irish bonds, these funds are now down to 25% at most.”
Long before the launch of the common currency, the Irish authorities had already been taking action to improve the marketability of the national debt. During the 1980’s the debt had grown substantially both in terms of size and complexity, and in 1990 legislation was passed which established the National Treasury Management Agency and which allowed the Government to delegate its borrowing and debt management functions. Prior to the establishment of the agency, the Irish national debt was managed principally by the Department of Finance, with short term paper issuance under the responsibility of the Central Bank.
There was another compelling force to improve the attractions of Irish bonds as Setanta Asset Management’s John Looby explains. “Exchange controls were lifted at the start of the 1990s, and all of a sudden Irish investors were offered the opportunity to invest elsewhere, and many of the alternatives were a lot more attractive than what was then on offer in the domestic market.”
Working closely with the capital markets and gaining considerable respect and praise along the way, the agency has set about re-moulding the Irish government bond market. A primary dealer system, of designated market makers, was introduced in 1995 that increased liquidity and improved the bond repo market.
In the months following EMU, the NTMA then set about its most ambitious project to date: the Securities Exchange Programme (SEP). The NTMA knew that they had to make sure that Irish bonds would be as competitive as possible in the new Euro environment, by having relatively large issue sizes and the technical characteristics, such as day counting, similar to those in the other Euro-zone markets. As result of the SEP, 84% of the outstanding issuance is concentrated in four benchmark bonds, of between E3 and E6 bn in size.
Of course, concentrating the market into these few bonds means that there is no viable yield curve, which is a problem for all investors, and particularly those who, like Setanta Asset Management part of the Canada Life Group have insurance companies as their parents.
Although there has been welcome and effective action from the authorities, the Irish investment community is under no illusions about the difficulties ahead. One manager described how the Irish dealers are cutting back on staffing, by not replacing salesmen that leave. Even the dominant player in the market, ABN AMRO who bought Dublin broker Riada, has reduced staffing levels in Dublin.
Looby was an NCB bond salesman in the Irish government bond market for eight years, before climbing over the fence and joining Setanta Asset Management. He probably knows more acutely than most the intensity of challenges ahead. He notes: “You can see the dynamism and determination that moved the authorities to make the changes they did. There really has been a great deal going on in the past decade, from offering tax relief to foreign investors to the very active LIBOR-based treasury activities.” The asset management side knows it has to change too and is already moving down the credit curve in its search for yield enhancement, he observes. “Although the skill sets needed are different, the sell side will follow,” he says. “It has already shown that it is capable of adapting to change. These guys know that change is part and parcel of the financial world. They know what needs to be done.”