Irish bonds suffer heavy selling as Brexit fears hit

CLIFF TAYLOR

Irish bonds have faced heavy selling on the markets, with worries about Brexit growing among investors. The interest rate on Irish 10-year bonds breached 0.9 per cent on Thursday afternoon, up from 0.83 per cent the previous day and sharply widening the gap between Irish borrowing costs and those in bigger EU countries such as Germany and France.

Selling started in the bond markets of smaller, peripheral EU countries in early trading and there was a steady trend of offloading Irish bonds throughout the day.

"Ireland was seen as vulnerable given our economic exposure to the UK," said Owen Callan, fixed income analyst with Cantor Fitzgerald in Dublin.

The interest rate on the Irish benchmark 10-year bond rose above 0.88 per cent by midday, and reached 0.92 per cent in late afternoon trading.

Notable widening

This was an acceleration of the sell-off which has led to yields rising from 0.7 per cent last Friday in what market analysts now say is a significant move. The consequence is a notable widening in the spread in interest rates between Ireland and Germany, which is now over 0.9 per cent, with German 10-year interest rates having gone negative earlier this week.

Further selling is possible in the days leading up to the Brexit vote, market sources in Dublin believe, or in the wake of a “leave”vote, though some believe that the presence of the ECB as a big buyer in the market will protect the bonds of peripheral countries to some extent.

While Irish bond interest rates remain very low in historical terms, the fear of Brexit is punishing peripheral markets. Thursday’s sell-off began in Italy and Spain, and later spread to Ireland, according to market dealers.

Despite the nervous mood, the NTMA managed to raise €500 million in six-month borrowings on Thursday morning at a negative interest rate of minus 0.22 per cent.

The bills, which have a maturity date of December 19th 2016, achieved an average yield of -0.22 per cent, the same yield as at the previous auction on March 10th.

Typically, investors are happier in times of uncertainty to extend money for short periods of time, but more nervous about longer-term borrowings. A key issue in the market at the moment is the presence of the ECB, which is buying billions of Government and corporate debt as part of its quantitative easing programme, helping to keep interest rates down.

Hard to predict

If Britain does vote to leave the EU, the extent of the impact on Irish bond markets will be hard to predict. An important factor would be whether the ECB would step up its buying of the government debt of peripheral countries, to help hold down their interest rates in the immediate aftermath of the vote. Some market analysts believe that after an initial sell-off , buyers could re-emerge for Irish bonds, given the relatively strong position of the Irish economy. However the prospect of a a slowdown in growth in Britain and its impact on Ireland would remain a concern.

Equities seen to be exposed in the event of Brexit were also hit again, with the ISEQ index of Irish shares down 1.74 per cent and a loss of over 2.8 per cent on average in Irish financial shares. Bank of Ireland shares lost 3 per cent while Ryanair lost more than 2 per cent.

Meanwhile official sources in Dublin say that their main concern in the wake of a leave vote would be the risk of a significant hit to sterling, which could be disruptive for Irish exporters to the UK, particularly SMEs who typically would have have hedged their currency exposures to the same extent as their bigger counterparts.