Short-term bond yields enter negative territory for first time

Irish bond yields sank to fresh lows yesterday as global markets digested the impact of Europe’s latest monetary stimulus. The European Central Bank’s surprise rate cut and new schemes to bolster lending saw the yield on two-year Irish notes dip into negative territory for the first time.

A negative bond yield essentially means investors buying the securities will get less back than they paid when the debt matures.

Short-term bond yields in Germany, France, the Netherlands and Austria also hit record lows while the euro hovered near a 14-month low against the dollar.

Yields on Irish 10-year benchmark bonds – essentially the rate at which the State borrows – also plumbed new depths, falling to 1.64 per cent yesterday, keeping borrowing costs here below that of the US and UK.

Euro zone flatlining

The slide in yields came as figures from

Eurostat

confirmed the euro zone economy flatlined in the second quarter, recording zero per cent growth.

However, German industrial output posted its biggest monthly increase since March 2012 in July, rising far more than forecast and marking a strong start to the third quarter for a key sector of Europe’s powerhouse economy.

As the impact of the ECB stimulus measures reverberated around financial markets yesterday, Minister for Finance Michael Noonan said the latest cuts in interest rates by Frankfurt would help Ireland continue its export drive.

“What was announced in Frankfurt brings down the exchange rate, when the exchange rate goes down our exports are more affordable so we export more,” he said.

Mr Noonan said foreign direct investment alone will not rescue the country and said the construction and retail industries are also picking up.

“Anybody who thinks the IDA alone with foreign direct investment will rescue the country no, but it’s a great lead in and a lot of other good things come with it.”

Several analysts said yesterday that ECB president Mario Draghi’s gamble had put the ball firmly back in the court of governments, notably France’s and Italy’s, to do their bit to heal the economy by cutting taxes or changing labour law to make their workforces more nimble.

As the euro zone's economic crisis has faded in memory after Mr Draghi promised to do whatever was needed to shield the bloc, the willingness of Europe's politicians to reform has waned, much to the frustration of Frankfurt. "This is the ECB telling European leaders: 'We are at the end of the road, now you have to deliver'," said Jacob Kirkegaard of Washington think tank the Peterson Institute.

Quantitative easing

Several commentators said Mr Draghi’s action also postpones a divisive debate about launching an all-out programme to buy government bonds or quantitative easing, a step that would be bitterly opposed by Germany and

Bundesbank president Jens Weidmann.

The euro yesterday remained rooted below the significant $1.30 level yesterday, trading at $129.60, leaving the currency on track for eight straight week of losses – the first time that has happened since its introduction in January 1999.

"If the primary reason for the ECB deposit rate cut yesterday was to weaken the euro it has been successful," said Chris Turner, a strategist with Dutch bank ING in London. – (Additional reporting by Reuters)