Cantillon: Making the most of the bond bubble

Everyone agrees it’s unsustainable, but the extraordinary run in government bond markets just keeps on going. This week a new benchmark was reached when Switzerland issued 10-year debt at a negative yield – in other words it charged lenders for the privilege of lending to it for a decade. Mexico issued a 100- year euro-denominated bond at just over 4 per cent.

In Ireland, 10-year Government bond interest rates were trading on yesterday at just over 0.7 per cent, fractionally above the record lows reached in early March. All Irish debt out to two years is now trading at negative yields and a few weeks ago Ireland joined “Club Neg” , the group of countries that issued new short-term debt at negative interest rates.

Few think this can continue in the long term but, with the ECB promising to buy more than €1 trillion of debt up to September 2016, and growth and inflation still low, the bond bubble remains in place.

In the medium term there are issues for all government borrowers, Ireland included. It would be a mistake to set national budgets on the basis that rates can remain at such lows in the years ahead, as experience suggests that when the market turns, it can turn quickly.

There is also a dilemma here for issuing authorities, such as the National Treasury Management Agency. Ireland has a pile of cash in its exchequer, and EU budget limits mean a lot of it cannot be spent, but still, borrowing money has never been as cheap.

Is there a case for the NTMA to borrow more than its 2015 annual target of €12 billion to €15 billion and refinance existing debt as aggressively as possible? It is worth considering, given the risk that in, say, two years’ time euro zone growth and inflation may have revived a bit, pushing bond rates sharply higher.

For the moment we must hope this period continues long enough for the State to offload stakes in Permanent TSB and AIB. Low bond yields and frothy equity valuations mean a lack of opportunities for investors, making it easier to attract interest from outside investors in our banks. It will end one of these days, but for the moment the desperate search for yield in international markets continues.