Q. Irish government borrowing costs have fallen again, with 10-year bond interest rates below 1.5 per cent, the lowest ever recorded. Are we that popular among investors ?
A. Yes and no! In Margaret Thatcher’s famous phrase “ you can’t buck the markets”. The price at which Irish debt is trading is the price the market is putting on it at the moment. But there is a context there, too. Interest rates are at historically low levels across Europe. The ECB is cutting short-term interest rates to try to revive the euro zone economy, and long-term interest rates have been driven down by a wall of investors’ cash looking for a home.
The latest move lower is driven by indications that the ECB will step up its policy of buying bonds to try to revive growth and, particularly, push up the rate of inflation. If there is a big new buyer on the horizon, prices tend to rise. This is now happening in bond markets. Bond yields in Europe fell pretty much across the board in recent days, with Spanish rates dropping below 2 per cent and the benchmark German rate just over 0.75 per cent.
Q. What does it mean for Ireland?
A. For the moment it means that we can raise new borrowings at a low rate. This lowers the cost of servicing new national debt and gives us the option of refinancing more expensive borrowings. At the moment the government is preparing to refinance some €18 billion of borrowings from the IMF granted under the bailout programme. Most of the money to make the first repayment – probably around €10 billion – is already in hand but the NTMA is likely to try to raise more money early next year to make a further repayment and will hope market conditions remain favourable. Also, the longer low rates remain, the more the NTMA can lock in new cash at low cost to fund ongoing borrowing,.
Q. Is it sustainable?
A. You would have to think that bond markets are now getting a huge boost from central bank activity and that, at some stage, this could quickly reverse. In the US, the Fed is already talking about starting to pull back on its quantitative easing programme.The ECB is in the opposite position, with president Mario Draghi hinting at new measures to tackle the risk of deflation.
Last week, in testimony in the European Parliament, Draghi clearly hinted that the ECB could consider buying government bonds next year, an extension of current plans to buy other market assets. His exact quote was : “Other unconventional measures might entail the purchase of a variety of assets, one of which is government bonds.”
This could underpin euro zone bonds for quite some time.That said, there is a sense that the markets are in a false world, underpinned by extraordinary central bank action. Average yields on euro zone government debt are now below 1 per cent and Germany can borrow at 0.75 per cent. Many analysts believe that the market could reverse quickly if growth and inflation across the euro zone picks up – or nervousness sets in – but there is no sign of that happening at the moment.
Q. Are investors not worried about warnings from the IMF and EU Commission that we should have done more to cut borrowing in the budget.
A. For the moment anyway, no. Ireland has beat its budget deficit targets consistently in recent years and looks on target to do so again. Most analysts judge the 2015 target to be achievable, as things now stand. The risk would be if Irish growth is hit by another euro zone downturn, pushing up our deficit requirement. This could lead investors to look for a higher interest rate to lend us money. In recent months, however, bond interest rates have only been going one way – down.
