Interest rates on Irish Government bonds hit their highest level in nine months on Monday, as a major sell-off in international bond market continued. Interest rates on the benchmark 10-year Irish bond breached 1 per cent, sharply up from under 0.7 per cent a week ago.
However bond prices did recover ground late in the day as some buying emerged at lower prices and the future direction remains uncertain. In after hours dealing Irish long-term rates slipped back under 1 per cent.
The international bond sell-off, evident since the election result, reflects increasing speculation that a major programme of tax cuts and spending increases by the incoming administration of US president-elect Donald Trump will push up inflation in the US economy and drive up interest rates. In turn this will hit bond markets, which reflect expectations of where interest rates are going to go. As the global bond rout intensified, US 30-year yields rose above 3 per cent for the first time since January.
The US Federal Reserve is now widely expected to increase US rates in early December, and there is rising speculation of several further increases in 2017.
Bond markets outside the US have also suffered, even though there is no expectation of an early move by the European Central Bank to increase short-term rates, against the backdrop of a weak euro zone economy. Market analysts say that the Trump administration move may signal populist pressures to increase spending elsewhere – and could also knock on to higher growth and inflation elsewhere.
However, bond prices had reached historic highs and their sharp fall also reflects a pull back from what had been seen as unsustainable levels.With uncertainty about what Trump policies will be implemented and when, analysts are slow to forecast what will happen next.
As US long-term interest rose, funds were attracted back into American assets. As a result the US dollar gained further ground rising over 1 per cent against the euro to $1.0730. It has now gained from over $1.11 before the crisis, providing some assistance to Irish exporters. With the euro also weak, sterling has held under 86p against the euro, well off recent lows of over 90p.
Irish bonds suffered heavily towards the end of last week, with selling reported from major institutional investors. Market sources say that the selling on Monday was not quite as heavy, but Irish bonds prices continued to weaken in line with international markets, before a late rally which left them just fractionally weaker on the day. Any sustained rise in bond interest rates would make it more expensive for the NTMA to raise cash for the exchequer.
Peripheral markets
The Irish market did not fall as heavily as some other peripheral markets on Monday morning, with ten year yields rising to around 1.05 per cent. The ECB is still buying European bonds – including Irish bonds – under its quantitative easing programme. However with an absence of other buyers in recent days, prices are still weak.
When Irish bonds price weakened earlier on Monday, some buyers emerged later, according to Ryan McGrath, head of fixed income strategy at Cantor Fitzgerald. Overall he pointed out that the Irish market had a better day than many other peripheral European markets, though all markets finished off their lows.
The bond sell-off wiped a record $1.2 trillion off the value of bonds around the world last week when Mr Trump won the election. Investors moved cash into stocks, leading to the biggest sell-off in global bonds seen for years. Bond prices had been trading at historic highs after central banks worldwide slashed interest rates in the wake of the financial crisis. Now, with a new presidency set to boost budget spending, US rates are seen to be heading sharply higher.
(Additional reporting Bloomberg)
