Sunday 17 December 2017

Irish bond yields hit 1pc as markets wake up to political danger

Donald Trump, right, greets former UKIP leader Nigel Farage at a rally in Jackson, Mississippi. Photos: Jonathan Bachman/Getty
Donald Trump, right, greets former UKIP leader Nigel Farage at a rally in Jackson, Mississippi. Photos: Jonathan Bachman/Getty
Donal O'Donovan

Donal O'Donovan

The State's cost of borrowing hit 1pc for 10-year debt yesterday, more than three times higher than the levels seen as recently as the start of October, part of a now global re-pricing of risk in the wake of the US election.

Anti-establishment votes in Britain and the United States have roiled markets twice this year and investors are determined not to be caught off guard again.

Rather than get caught on the wrong side of another vote, investors are selling bonds or demanding higher returns for what are now seen as increasingly risky assets.

In 2017, voters in the Netherlands, France and Germany - and possibly in Italy and Britain too - will vote in elections that could be coloured by the triumphs of Donald Trump and supporters of Brexit, and the politics that drove those campaigns.

A litmus test for Europe is around the corner in Italy's referendum on constitutional change on December 4. On the same day, Austria holds a re-run of a presidential election in which one of the two neck-and-neck candidates is from the far-right.

No wonder then that, in a general bond market sell-off since Tuesday's US election, some of the heaviest selling has hit France and Italy as investors brace for the potential of another anti-establishment drubbing in two big regional economies.

Top-rated German 10-year bond yields, which move in the opposite direction to the price, have risen about 17 basis points this week as investors bet protectionist policies and extra spending under President Trump will boost inflation.

But French and Italian equivalents have soared roughly 0.25pc as investors also price in greater political risks. French yields are poised for their biggest weekly rise since June 2015, when a euro zone bond sell-off was at its peak.

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"We've had an anti-establishment vote in the UK, one in the US and now everyone's looking at the euro zone and thinking, where do we have elections next year? Yes, France, so people are trying to zoom in on those countries that may be at risk," said Martin van Vliet, a senior rates strategist at ING.

France has a presidential system and the chances of Marine Le Pen, leader of the far-right National Front, winning are seen as slim. But polls suggest she will win more support than any other politician in the first round of the election.

Having been caught out by Britain's shock decision to leave the European Union in June and Trump's surprise election win, markets are unlikely to take polls for granted in the future.

Investors are also waking up to the fact that a populist tsunami that seemed unthinkable a few months ago has potentially huge consequences for Europe's political landscape.

French 10-year bond yields, at 0.72pc for 10 year bonds, are near their highest levels since January. Irish 10-year bond yields hit 1pc yesterday, a level last seen back in February and well above levels where the State has gotten used to being able to borrow.

Investors aren't concerned about a rise in anti-establishment parties in Ireland, so far, but do see potential risks for this country from the policy shifts in biggest trading partners, the US and UK, according to Ryan McGrath of Cantor Fitzgerald. The gap or spread between German borrowing costs and those of France, the Netherlands and Italy are rising, as the rise of populism risks upsetting the traditional order. (Additional reporting Reuters)

Irish Independent

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