NTMA highlights Brexit risks to Irish bonds

Brexit concerns could lead to bond investors taking a dimmer view of the State's creditworthiness compared with Germany and other euro-zone markets, the National Asset Management Agency (NTMA) has signalled.

The difference between the market interest rate, or yield, on the Republic’s benchmark 10-year bonds has widened by as much as 0.1 of a percentage point to 0.65 points against similar German notes in the past two weeks. The spread between the two yields had been as low as 0.44 points in July.

This spread is a market indicator of investor sentiment towards Irish government debt and a barometer of the State’s creditworthiness relative to other countries. The recent increase in Irish yields has been out of sync with so-called core euro-area government borrowers such as Germany and the Netherlands, and semi-core issuers such as Belgium and France.

“While overall interest rates remain low and our credit spreads are tight by historic standards, the recent move in spreads is noteworthy,” said NTMA director of funding and debt management Frank O’Connor.

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“We have completed our funding requirement for this year but Brexit-related sentiment may have more of an impact on our credit spread as we enter 2019.”

Ireland, whose 10-year bonds are currently yielding 1 per cent, has typically been among the first European countries to venture out into the bond markets with multibillion-euro bond sales in early January in recent years.

Bond sales

The NTMA sold €750 million of five- and 10-year bonds earlier this month, bringing total long-term debt raised during 2018 to €17.3 billion, at the upper end of its full-year target of between €14 billion and €18 billion.

The agency has previously said it expects to end the year with a cash balance of €13 billion, giving it a degree of headroom as it faces potentially more volatile times. The European Central Bank’s €2.6 trillion bond-buying programme, known as quantitative easing, which has helped to bring down euro-area borrowing costs in recent years, is also set to end in December.

The Republic must redeem some €14.6 billion of maturing bonds in 2019, according to Bloomberg data.