Irish borrowing costs fall to new record low on foot of stimulus

Irish borrowing costs tumbled to a new record low today, as markets were buoyed by another European Central Bank stimulus aimed at fighting low inflation and propping up the bloc's fragile recovery.

Irish, Italian and Spanish bonds led the way in a rally that stretched across all euro zone government debt, as investors predicted new ECB’s measures would help promote bank lending in the continent’s struggling states.

Yields on Irish benchmark 10-year bonds fell 11 basis points to a record low of 2.47 per cent earlier today, keeping Irish borrowing costs below that of the US.

Italian and Spanish 10-year bond yields dropped 14 basis points to new record lows of 2.80 and 2.69 per cent, respectively, while Greek yields fell 31 points to 5.93 per cent, heading back towards four-year lows hit in April.

Strategists said the ECB’s actions should ensure a continued period of low volatility which would encourage investors to park money in higher-yielding debt, driving down peripheral borrowing costs relative to those of their safer peers.

"The real consensus coming out of the ECB meeting yesterday is that these measures will be supportive of the periphery," said Anton Heese, co-head of European interest rates strategy at Morgan Stanley.

“The way the ECB has tried to design its policy response is to enhance the transmission mechanism and this should be filtering through into lower funding costs in the periphery.”

The ECB cut all its main rates to record lows, taking the unprecedented measure of imposing negative interest rates on overnight bank deposits.

Among other measures, ECB president Mario Draghi also outlined a new long-term loan programme for banks to promote lending to small and mid-sized businesses.

"The ECB delivered a comprehensive package, and short of outright asset purchases it contained pretty much everything investors could have hoped for," said David Riley, head of credit strategy at Bluebay Asset Management.

While the pace of today’s rally was more pronounced in lower-rated bonds, borrowing costs in higher-rated countries also fell sharply. Yields on Belgium’s 10-year bonds dropped 10 bps to a record low of 1.82 per cent.

The rally also touched 10-year German bonds - the benchmark for euro zone borrowing - where yields moved 4 basis points lower to 1.32 per cent.

Traders said the widespread rally was partly because the ECB had kept hopes alive of a broader asset-purchase programme that could incorporate all euro zone government bonds.