Irish borrowing costs fall on QE talk

Most eurozone bond yields fell yesterday, including the cost of borrowing for the Irish Government, after ECB policy makers hinted at their readiness to modify or expand their unprecedented stimulus programme should market turbulence warrant further action.

Spanish and Portuguese yields climbed, however, hurt by doubts over the political situation ahead of elections.

The Irish yield on the 10-year bond fell to 1.21%, building on the declines recorded last week after the US Federal Reserve left US interest rates unchanged, said Ryan McGrath, senior bond trader at Cantor Fitzgerald Ireland.

Ireland’s funding requirements are relatively small this year and in 2016 however, and the Government may not benefit from the prolonged period of low interest rates.

Irish yields are now trading close to levels they were at earlier this year.

The ECB’s chief economist said yesterday the risks in the world economy “have increased significantly”, while governing council member Ewald Nowotny said eurozone interest rates will stay low as long as growth stays low.

The ECB launched a €1tn bond-buying programme known as quantitative easing (QE) in March but has failed to sustainably lift the market’s long-term inflation expectations.

“Everybody’s hyped up about ECB QE extension,” said Martin van Vliet, senior rate strategist at ING.

German 10-year bund yields, which set the standard for eurozone borrowing costs, fell four basis points to 0.65% Most other eurozone yields were down two to four basis points.

The ECB comments come after the US Fed prolonged the era of nearly free money by not hiking interest rates last week, citing global economic risks.

“I’m not too convinced that they are signalling they are ready to do something in October, but it does support our view that if nothing changes between now and December, the ECB may have to add more stimulus,” said Elwin de Groot, senior market economist at Rabobank.

To some analysts, the US economy looked robust enough to justify a hike, but a slowdown in China and a slump in oil and commodity prices hurting the inflation outlook across the world tilted the balance towards a delay of what would be the first hike in a decade.

Spanish 10-year yields were up one basis point at 2.02%, while Portuguese yields rose three basis points to 2.62%.

In Spain, investors worry a win for secessionists in a regional election on Sunday in Catalonia could trigger political instability. In Portugal, the October 4 elections are likely to produce a hung parliament.