Tuesday 27 September 2016

State borrowing costs less than zero, despite hung Dáil

Published 04/03/2016 | 02:30

ECB president Mario Draghi
ECB president Mario Draghi

Borrowing costs for the State have fallen so low it would cost lenders to buy Irish bonds, as the markets continue to shrug off the impact of last week's inconclusive general election.

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So called negative interest rates happen when investors have to pay so much for a bond that it is more than the combined face value of the debt plus the interest due on it.

The higher the price paid for the bonds, the lower the yields, or return.

The yield on Irish government bonds due to be repaid in one, two and five years was negative yesterday.

The return on 10-year bonds was just 0.88pc.

It means it costs money in real terms to own the bond, and while its a boost to the Government's ability to borrow it highlights real problems in the economy.

Bonds typically trade in negative territory when investors are so fearful they are prepared to buy assets at a known loss rather than buy riskier investments that might generate an income.

However, in the current market Irish bonds have dropped into negative territory for only the second time ever in anticipation that the European Central Bank will boost its bond buying programme next week in a desperate bid to kick-start the economy.

The ECB's quantitative easing programme has flooded European markets with cash and many investors are hoping to book a capital gain by selling on even negative yielding bonds at a higher price when the bank lifts its acquisition target.

However, signs are emerging that investors are exiting what is a highly distorted market.

Negative yields are eroding government bonds' appeal for new investors and making current holders less likely to sell.

Liquidity in two-year German note futures - one of the most sensitive securities to ECB policy - has fallen 56pc since November 2014, data from JPMorgan show.

"Any deterioration in market liquidity indicates investors are less willing to hold or trade these securities," said Nandini Srivastava, a global market strategist at JPMorgan.

(Additional reporting Bloomberg)

Irish Independent

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