Irish State bond rates spike amid worst month for European bonds

The market interest rate on Irish Government bonds spiked in August as the wider European bond market posted its worst-ever monthly performance as investors anticipated large interest rate hikes to tackle soaring inflation.

Euro-zone inflation accelerated to a fresh all-time high of 9.1 per cent in August from a year ago, fuelled by a 38.3 per cent surge in energy prices, the European Union’s statistics agency Eurostat said on Wednesday.

Economists at Goldman Sachs and Bank of United States subsequently joined a growing list of financial houses now forecasting that the European Central Bank (ECB) will raise its key rates by 0.75 of a percentage point at a monetary policy meeting next week. They had previously pencilled in a 0.5 percentage point hike, following on from a similar move in July.

The region’s market for high-grade government and corporate debt posted a fall of 5.3 per cent in the month to Tuesday, the biggest drop since the Bloomberg pan-European Aggregate Total Return index began in 1999. The returns were pulled down as bond prices fell as their market rates — or yields — moved, inversely, higher.

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The yield on Ireland’s benchmark 10-year bonds had jumped to 2.18 per cent on Wednesday from 1.46 per cent a month earlier. The yield on Germany’s benchmark 10-year bonds have also risen more than 0.7 percentage points, to 1.54 per cent, in August, marking its biggest monthly jump since 1990.

The Irish National Treasury Management Agency is planning to raise as much as €1.25 billion in the international bond markets on Thursday against the backdrop of rising borrowing costs. That would see total funding raised far this year to €7 billion, compared with its full-year target of €10 billion to €14 billion.

The continent’s bond markets have been knocked as investors brace for more aggressive central bank rate rises in the face of surging food and fuel prices triggered by Russia’s war in Ukraine.

The latest euro-zone report underlined how high inflation is becoming embedded more broadly across the economy.

“The one single factor that’s driven bond yields higher in August is the explosion of energy prices in Europe,” said Antoine Bouvet, senior rates strategist at ING.

Financial markets expect the ECB’s deposit rate to hit 2 per cent by March from zero currently while the Bank of England is being priced to raise rates to 4.1 per cent in March from a current level of 1.75 per cent, according to Bloomberg data based on pricing in money markets. — Additional reporting: Financial Times Limited 2022