Tuesday 24 April 2018

Finally, we're burning the bondholders - as they pay to loan money

Investors will pay State €45,000 a year in historic debt deal

The NTMA’s chief executive Conor O’Kelly. Photo: Tom Burke
The NTMA’s chief executive Conor O’Kelly. Photo: Tom Burke

Gretchen Friemann

Bondholders are now paying us to lend us money.

In a dramatic turnaround, investors are paying Ireland to give money to the country on a medium-term basis for the first time ever.

The country will be paid about €220,000 by investors to hold its sovereign debt after the State sold €500m worth of five-year bonds at a negative interest rate.

The deal marks a stark contrast to the nadir of the banking crisis in 2010 when the country's debt managers, the National Treasury Management Agency (NTMA), was effectively locked out of credit markets as the country neared financial collapse.

Almost eight years later, investors will now pay close to €45,000 per annum - €225,000 over the five years - to retain bonds that mature in 2020 after investors agreed to a negative 0.009pc yield.

Normally investors are paid interest when they lend a country money. However, abnormally low interest rates have resulted in money being raised at zero per cent, or sometimes at a negative interest rate.

The NTMA has in the past also borrowed money on a short-term basis with negative yields - but not over five-year periods.

The deal principally reflects the inexorable power exerted on rates by the European Central Bank's ultra-loose monetary policy. However, it also underscores the strength of the economic turnaround since 2009 and 2010. The downturn eventually triggered a near €60bn bailout and the arrival of the Troika.

NTMA chief executive Conor O'Kelly recalled earlier this week how his team, at the time of the height of the crisis, was told by investors to talk to the "junk bond guys", underlining how Ireland was viewed as creditworthy as an emerging economy.

It was not until 2012 that the NTMA returned to the market with a five-year bond that attracted an interest rate of 5.9pc.

The ECB's asset purchasing programme, or Quantitative Easing (QE), has helped force that rate in to negative territory.

But the NTMA is unlikely to witness a repeat of yesterday's milestone in the near future.

Within hours of securing the negative yield, the new bond was trading in positive territory after a report revealing ECB chief Mario Draghi is likely to signal an end to QE at a speech in the US in August sent jitters through markets.

Investec analyst Owen Callan noted that future five-year bond sales are likely to attract a higher rate as Mr Draghi moves to rein in QE. But he said it made sense for the NTMA "to lock" in these historic low rates.

In total, the debt agency sold €750m worth of bonds and against a bullish market backdrop that attracted a yield of 1.953pc on borrowings that will mature in 2045. Both auctions were heavily over-subscribed and the bond sales take the total issued so far this year to €9.5bn, well within the NTMA's €9bn to €13bn target for the year.

However, if two placements to the market are factored in, including a €609.5m inflation-linked bond, the figure is over €10bn. According to Cantor Fitzgerald analyst Ryan McGrath, the NTMA now has flexibility to issue maturities where the demand is greatest.

The negative interest rate on the new five-year bond represents another milestone, as the Government has never issued medium-term bonds at a negative rate before.

Irish Independent

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