Irish Government borrowing costs fall sharply

Lower bond yields imply Ireland will have little difficulty raising money this year — but the eurozone could be facing recession

Finance Minister Paschal Donohoe.

The implied cost for the Government to borrow from international debt markets fell significantly yesterday, as traders reined in expectations for European Central Bank rate increases over the coming months.

The yield, or interest rate, on the Irish 10-year bond traded at 1.83%, down in the session, and sharply lower compared with the yield of 2.4% less than a month ago.

The lower yields imply that the Government would have little difficulty in raising money this year but also reflect market assessments that the eurozone could face recession should Russian gas supplies to Germany and the rest of Europe be curtailed during the autumn and winter months.

Ireland now has relatively cheap borrowing costs in Europe.

The 1.83% yield on the 10-year bond is slightly cheaper than that of Belgium and is almost the same as Austria’s, according to market figures from Trading Economics.

It also compares with the 1.78% yield for France, the 1.57% cost for the Netherlands, and 1.24% for Germany. However, it is much cheaper than the yield on the Italian 10-year bond of 3.32% and the 2.34% for Spain.

Market interest rates for eurozone government borrowings had climbed from a year ago on expectations that the European Central Bank would aggressively start to hike official interest rates, starting at its meeting next week, to stop inflation getting out of control.

In Ireland’s case, the yield on the 10-year bond traded close to zero a year ago.

However, amid concerns over disruption to Russian gas supplies triggering a recession in Germany, traders are now expecting the ECB won’t hike rates as high as once feared.

Dermot O’Leary, chief economist at Goodbody, said that Ireland’s borrowing costs had moved in from the so-called eurozone periphery, as the robustness of the economy was shown during the Covid-19 crisis.

Investors await US inflation data on Wednesday, which could force another super-sized hike in US interest rates by the US Federal Reserve.

All eyes will then be on the ECB meeting next week.

“A crucial litmus test for the tightening pattern could come much earlier, though, with the planned end of the Nord Stream 1 maintenance targeted to end one day after the ECB lift-off decision,” the Commerzbank analysts said in a research note.

Germany is in the dark about how much gas Russia will pump through the Nord Stream 1 pipeline after the end of a 10-day maintenance shutdown that started on Monday, Germany’s energy regulator told Reuters. ECB policymakers pledged to buy more bonds from debt-laden countries such as Italy to contain a widening spread between their borrowing costs and Germany’s that might hamper monetary policy transmission across the bloc.

Bundesbank chief Joachim Nagel disagreed with that decision and warned against trying to decide the right market spread as that was “virtually impossible” and risked making governments complacent, according to sources. ECB aid to tackle rising government debt yields in some euro zone countries should come with conditions, an adviser to German Finance Minister Christian Lindner said.

• Additional reporting Reuters