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Bond Investor Takes Big Punt on Ireland

A prominent US bond investor has increased an already aggressive bet on Ireland's recovery from the financial crisis, raising eyebrows among rival fund managers.

Dennis Flaherty | Photographer's Choice RF | Getty Images

Franklin Templeton funds increased their holdings of Irish bonds by more than a third to at least €8.4 billion in the third quarter. This means that the San Francisco-based US asset manager now controls almost a 10th of Ireland's entire government bond market.

Most of the bonds have been snapped up by funds controlled by Michael Hasenstab, co-director of Franklin Templeton's international bond department, and particularly by the $64 billion Templeton Global Bond Fund he manages.

A €1.4 billion stake in the benchmark Irish government bond maturing in October 2020 represents the fund's single biggest holding.

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In a recent note to clients, Mr. Hasenstab wrote: "The country, despite facing great adversity, continues to make progress on fiscal reform and is increasingly getting recognition as a model for other countries."

So far the purchase of Irish debt has proven profitable. The benchmark 2020 bond has rallied strongly this year, with the yield falling from 8.4 percent at the start of the year to 4.6 percent last Friday – the lowest since the eurozone debt crisis started to rumble in May 2010.

This has helped Mr. Hasenstab's flagship fund to a 12.6 percent gain this year, making it one of the better performing bond funds in the world so far in 2012.

However, rival asset managers cautioned that they believe Franklin Templeton's aggressive purchases are a major cause of the rally in Irish debt, which has obscured the country's still severe economic and fiscal challenges.

"It's a huge bet," said one senior UK fund manager. "It is beyond the scale of comprehension in a small, periphery market like Ireland."

Franklin Templeton's heavy third-quarter purchases helped subdue Ireland's bond yields, despite the headwinds of poor news.

In late June, European policy makers announced they would allow the EU bailout funds to inject funds directly into banks, in theory allowing the Ireland to transfer the costs of rescuing its banks to the eurozone funds. It was hailed as a "game changer" for Ireland, and the government's benchmark bond yield fell almost a percentage point within days.

Despite the fact that the northern European states in squashed the idea in late September, and a more pessimistic economic growth outlook from the government earlier this month, Ireland's bond yields have continued to head downwards.

Rivals warn the bond rally could unravel quickly if Franklin Templeton is forced to reduce its positions due to investor withdrawals or a worsening of the eurozone crisis

But for now the US asset manager has proven keener to add to its holdings than pare them back.