For all the predictions of bond market distress in the wake of the inconclusive election, the initial response was subdued.
Still at issue, however, is whether the twists and turns of the political negotiation lead to prolonged stalemate and higher borrowing costs. With bond yields not far from record lows, markets assume the fractured body politic will do a deal eventually to provide a durable new administration.
In line with euro zone sovereign bonds generally, Irish borrowing costs over 10 years eased back a little yesterday.
Far from any major disruption to Irish debt, the market at large was spurred on by the expectation of further monetary easing from the European Central Bank at the bank’s regular meeting next week. This drove German yields lower and the rest of the market followed suit.
As business wound up for the night, traders observed that Irish debt yields had been something of an outlier during the day. At one point the yield on Irish 10-year bonds had edged 0.02 percentage points higher at a time when Spanish, Italian and Portuguese bonds were all lower by 0.05 percentage points on average.
Having finished last week at 0.886 per cent, the yield on 10-year Irish debt closed on yesterday at 0.86 per cent.
“Ireland is underperforming. But, my God, what a muted reaction,” said a senior Dublin bond trader. “The attitude is: there’s nothing to see here, move on. I presume that the international view is that we’re going to have a Fine Gael-Fianna Fáil coalition. They don’t see any difference between those two. It’s only locally we see a difference.” Stable government If the FF/FG option is seen in the eyes of bond investors to provide potential for a stable government, traders believe the market is taking less account of prospects for a minority FG administration.
This would be more risky, with a greater danger of collapse. Given Fianna Fáil’s reluctance to prop up its old enemy, however, a minority government is seen in political circles to be more likely at this point.
For all that, Deutsche Bank analyst Mark Wall said in a note on the election the two potential governments that could emerge were “at least” dominated by pro-EU establishment parties.
“Assuming an immediate new election is avoided – perhaps nothing will have changed, and in any case the risk of Brexit strengthens the ‘national interest’ case in having a government as soon as possible even if it were to be a limited objective, limited life government,” said Deutsche.
“The radical left and populist bloc, while large, is still too fragmented to create an effective platform for alternative government.”
It’s still early days, of course. Any drift towards a second election might meet a different market response.
