Markets are more focused on ECB than Kildare Street

Fears about a hung Dáil have been overcooked, and the reaction of Irish bond markets today to the prospect of a prolonged period of political uncertainty is expected to be muted, experts say.

During the election campaign, warnings had been made that the yields or costs of Irish borrowing would climb, if a government could not be agreed when the Dáil next meets on March 10.

The indecisive outcome of elections in Spain and Portugal late last year were blamed for pushing up the costs of borrowing for Madrid and Lisbon. The costs of borrowing for Portugal for ten years soared to over 4% after a new anti-austerity and centre-left government picked a fight with the European Commission about the timetable for closing its budget deficits.

However, bond markets on March 10 will be solely focused on the outcome of the ECB meeting in Frankfurt to decide whether to increase further measures to boost the dormant eurozone economy.

“If you look at (Irish) bond yields on Friday they were below 1%. So they are not too worried. The big issue is whether the ECB on March 10 will have more stimulus,” said Alan McQuaid, chief economist at Merrion Capital, saying fears for Irish bonds had been “overcooked”.

Peter Brown, director of education at the Institute of Investing and Financial Trading, said bond markets would wait and see to judge the next government. Markets had “much bigger matters” to worry about, including the costs of European migration and the threat of the UK voting to leave the EU.

“The market is not going to panic about Ireland. It has bigger things to do and I can’t see it panicking about Ireland on the basis of having a difficult negotiation of a month or so in forming a government,” Mr Brown said. The landscape had changed dramatically since 2011 when international bond markets were watching every move and statement by the then incoming Fine Gael and Labour coalition.

Mr McQuaid said Irish yields, even if they were to increase slightly, would remain close to historic lows.

He said Portugal has an extra problem in that only one of the four main ratings agencies marks the country as creditworthy. Any loss of that rating could put at risk Portugal’s continuing participation in the ECB’s huge €60 billion monthly bond-buying programme, known as quantitative easing.

In Spain, although the outcome of their election was similar to Ireland’s, Madrid faces a deadline in forming a government and has to deal with a secessionist threat from Catalonia.

Experts say international debt markets have bigger matters to worry about than the Dáil election.

They point to the most recent bout of uncertainty for Irish bonds when the yields jumped one afternoon in early December, by as much as 30 basis points or 0.3% — a huge movement in international debt markets. But the sharp move came amid markets’ disappointment with the scale of financial supports offered by ECB president Mario Draghi.

The Dáil meets on March 10. But the focus of bond markets on that day will be on Frankfurt, when the ECB next meets to consider increasing the scale of quantitative easing.