State’s borrowing costs drop despite impasse in coalition talks

The costs of borrowing for the State have fallen sharply since the election, defying fears of some politicians and commentators, despite no agreement over a new government.

As the Dáil met yesterday for a second time since the vote on February 26, the yield on the Irish benchmark 10-year bond was trading close to 0.75%.

That leaves the implied cost of borrowing for the State on sovereign debt markets sharply lower from over 0.93% on March 10 — when the new Dáil first convened after the election — and compares with a rate of 0.89% on polling day.

The sharp fall reflects the action taken by the ECB to stimulate the moribund eurozone economy by increasing the firepower behind its already mighty bond-buying programme.

It also reflects the dire straits still facing Europe eight years on from the global financial crisis.

The ECB had also met on March 10 to increase to €80bn from €60bn its monthly firepower in buying eurozone sovereign bonds and corporate debt paper.

Its aim to ultimately drive up inflation and see off the threat of deflation in Europe has so far shown little success.

The slump in European bank stocks this year reflects investors’ fears about the scale of bad loans still on the balance sheets of banks. 

With the ECB effectively acting as a bond-buying machine, most of the 19 countries sharing the single currency have also seen their borrowing costs drop in recent weeks.

However, Irish bonds despite political uncertainty at home have also done well in terms of the so-called spread, or the premium, they trade compared with those of the eurozone benchmark, Germany.

Yesterday, German 10-year bonds were trading at a yield of only 0.12%. That implies the German state can effectively borrow money free for 10 years. 

The spread of Irish bonds over Germany has also narrowed since the election, to 63 basis points from a premium of 75 basis points on February 26.

And despite its inconclusive result to its election, Spain’s 10-year bond was trading yesterday at 1.49%, down from 1.69% on its polling day on December 20.

Portugal has fared less well since its election late last year. 

The yield on its 10-year bond has soared to 3.20% yesterday from 2.29% on the October 4 polling day. 

The spreads for both Spain and Portugal have both widened against German bunds.

Philip O’Sullivan, chief economist at Investec Ireland, said economic indicators since the election point to continuing growth here, while the National Treasury Management Agency has been redeeming bond debt and therefore reducing “the pool of bonds” available to the market.

“Since the election there is no nervousness in the bond markets on the back of no government being formed,” said Peter Brown, director of education at the Institute of Investing and Financial Trading.

“This is because the market firmly believes that the next government will follow the EU fiscal rules and will behave favourably to the bond market investors,” he said. 

Mr Brown said it was likely, even if there was no agreement between the parties for several months, that, at worst, Irish bond yields would rise only slightly.

That’s because, from the perspective of bondholders, “nothing crazy is going to happen”, he said.


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