Irish long-term interest rates hit record low

Irish long-term interest rates have hit a record low as the global bond market enjoyed a powerful rally on Wednesday. Investors are betting that Christine Lagarde's nomination to be the next president of the European Central Bank will extend an era of ultra-loose monetary policy in the euro zone.

Irish 10-year bond interest rates are now trading just in positive territory at 0.066 per cent and shorter-term Irish government debt is now trading at a negative interest rate, as rates fall to record or near-record lows across Europe. The low rates, if sustained, will help the National Treasury Management Agency (NTMA) to refinance maturing borrowing at rock-bottom interest rates. It may also mean that banks trim existing fixed-term interest rates offers to mortgage borrowers, as they get access to cheaper finance.

Bond prices had already rallied strongly in recent weeks, stoked by a growing conviction that outgoing ECB boss Mario Draghi is readying interest-rate cuts and a revival of the bank's bond-buying quantitative easing programme. Meanwhile, the US Federal Reserve may also trim rates this summer.

Ms Lagarde’s appointment, yet to be finally approved, is expected to bring more of the same accommodative monetary policy. Expectations of a dovish approach by Lagarde helped push bond interest rates lower across Europe, according to Philip O’Sullivan, economist at Investec. This should allow the NTMA to raise finance at ultra-cheap rates to replace more expensive borrowings, including a 5.9 per cent bond maturing in October, he said.

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The drop in borrowing costs on the market may also increase pressure on the banks to trim rates to borrowers, notably fixed-term rates now popular with new borrowers.

Euro bond yields

Many European bond yields, which move inversely to prices, fell deeper into negative territory yesterday. The yield on Germany’s 10-year bond, which serves as a benchmark for the region, hit a record low of minus 0.397 per cent, just a whisker above the ECB’s deposit rate of minus 0.4 per cent. France’s 10-year yield sank further below zero, touching minus 0.09 per cent. Two-year yields across the entire euro zone, including in Ireland, are now sub-zero.

Italian bonds were the strongest in the pack, boosted further by news that the populist government has avoided censure from the EU over its newly revised spending plans. Ten-year Italian government debt yields have sunk to just under 1.7 per cent, the bonds’ strongest level since the government was formed last year.

The rally spread across the Atlantic, pushing the 10-year Treasury yield down to a fresh two-and-a-half-year low of 1.94 per cent, and helped lift the S&P 500 equity index by 0.5 per cent in early trading. Emerging market bonds also enjoyed a Wednesday bounce.

Investor boost

Markets are now convinced that looser monetary policy is on the way from several central banks, an assumption that has added fuel to a broad-based fixed income rally in 2019 and pushed the average yield of $57tn of global bonds down to just 1.67 per cent.

The expected drop in European benchmark interest rates is a boost for investors who have bulked up on bonds but some fear it also places pressure on the region’s banks and insurers, a concern the ECB has been keen to rebuff.

Mr Draghi, who is due to leave the bank at the end of October, said last month that unless there were improvements in the inflation outlook there would be a fresh bout of stimulus, including the possibility of more QE. Some investors think policymakers could act as early as the ECB meeting later this month.

The decision of European leaders to pick the IMF managing director for the ECB's top job means the selection of a more hawkish candidate, such as German central bank president Jens Weidmann, has been avoided. – Copyright The Financial Times Limited 2019