Business Irish

Monday 26 February 2018

Don't believe the hype: bond yields still 'not sustainable'

AFTER all the hoopla surrounding the NTMA's sale of €5.23bn of Irish government bonds this week, it might be a good idea if we kept things in perspective.

At an average yield of 5.95 per cent the price we paid for the money is in the words of Finance Minister Michael Noonan "not sustainable".

One would have been forgiven for thinking that we had won the financial equivalent of the Olympics on Thursday. Just a day before the real thing opened in London, the sale by the NTMA of €3.88bn of five-year bonds and a further €1.34bn of eight-year bonds was greeted by the NTMA and the Department of Finance as marking Ireland's "return to the bond markets".

Well, kind of.

The NTMA sold the eight-year bonds at a 6.1 per cent yield and the five-year bonds at a 5.9 per cent yield, representing an average yield of 5.95 per cent. With total Irish government debt set to hit €186bn by the end of this year, such a yield would translate into a total interest bill of over €11bn as against the €7.2bn we will actually pay or accrue in 2011.

With the Government desperately seeking to devise a mechanism to either write down or extend the €63bn of debt incurred in bailing out the banks, even a €7.2bn annual interest bill is hardly sustainable in the medium to long term. If we are ever to stage a full return to the bond markets then we have got to get both the total amount we owe our creditors -- both to bondholders and official lenders -- and the cost of servicing that debt down.

While this week's bond sale represents a welcome first step on the road to recovery, more, much more, still needs to be done.

Sunday Indo Business

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