Record low interest rate for €1bn bond

The Government raised €1bn in a 10-year bond in its first scheduled auction in four years at a record low interest rate of 2.967%.

National Treasury Management Agency (NTMA) chief executive John Corrigan said: “The completion of this auction marks Ireland’s full return to the markets for the first time since September 2010 and brings to a successful conclusion the NTMA’s programme for a phased return to the markets carried out over the past two years.

“The €1bn funding raised, together with the €3.75bn raised in the syndicated issue on January 7, amounts to almost 60% of our funding target of €8bn for the full year,” Mr Corrigan said.

The issue was almost three times oversubscribed, reflecting the robust level of investor demand for Irish debt.

“Outside of new issuance, another near-term objective for the NTMA is to reduce the 2016 ‘funding cliff’ through either top slicing or offering a switch to holders of the 4.6% 04/16 bond (€10.2bn outstanding). With that bond trading at a chunky premium to par, we think a switch is more likely (although the negative carry on the NTMA’s €20bn of cash — that’s 12% of GDP — means that a top-slicing cannot be ruled out),” said Investec chief economist, Philip O’Sullivan in a research note.

“Looking further out, given where Irish yields are at, the NTMA is also likely to be considering refinancing some of the pricier troika loans, which would further enhance the country’s debt sustainability,” Mr O’Sullivan added.

However, the low yields on Irish Government debt could have more adverse effects over the medium term.

The Government is locked in negotiations with EU authorities over debt relief for the banking system. This includes the €30bn it pumped into AIB, Bank of Ireland and Permanent TSB.

The Department of Finance is also looking for EU assistance with the funding of tracker mortgages. Moreover, the PTSB restructuring plan submitted to the European Commission hinges on EU support.

There is roughly €50bn of tracker mortgages sitting on the balance sheets of the three domestic banks. The interest rate on these products is lower than the banks’ cost of funding.

The Government had been looking to set up a separate ECB funding line for the tracker products in order to accelerate the banks’ return to profitability. However, in a paper issued by the European Commission last week, it recommended that the Government use its low cost of funding to raise money in order to sort out the tracker problem.