Wednesday 21 March 2018

Interest rate on government borrowing rises

Brendan Keenan

THE interest rate on new government borrowing is again higher than it was 12 months ago, as the gains from the recent stress testing of EU banks evaporate.

The yield that investors demand for lending to Ireland for 10 years rose a further 0.19pc (19 basis points) to more than 5.2pc yesterday.

This is 30 basis points more than the same day in 2009, and six basis points above the level six months ago. The difference between the yield on German government bonds was the highest for two weeks.

The new rise came as the National Treasury Management Agency, which handles the national debt, announced that it would raise fresh borrowing next week through the auction of bonds repayable in 2014 and 2020.

The amount will be announced on Friday but is likely to be the typical €1.5bn monthly auction.

There seems little doubt that the money will be raised, however, there will be disappointment that the recent falls in yields have not been sustained.

The Irish 10-year yield fell below 5pc after the two big Irish banks passed the EU stress test two week ago. There was a general fall in yields in peripheral euro countries after figures about banks' holding of government debt were published.

Spanish debt

Spain saw the biggest fall, but rates are also rising there. Yesterday, 10-year Spanish government debt was yielding a quarter percentage point higher than a year ago.

"There have been some bad headlines about Ireland's banking sector and its fiscal outlook," said Padhraic Garvey, head of developed markets debt strategy at ING.

"Irish bonds have held up remarkably well until now. The market seems to be catching up on negative news, perhaps using the upcoming bond sale as an excuse to sell."

On Monday, Standard & Poor's said it would not rule out further credit-rating downgrades on Anglo Irish Bank.

The increase in yields came against the background of a general rise in eurozone bonds, especially on those repayable in 30 years. One reason was expectations that the US Federal Reserve would signal it is ready to take steps to support growth, which might mean more purchases of US bonds.

The moves were exacerbated by low trading volumes, said Luca Jellinek, head of European interest-rate strategy at Credit Agricole Corporate & Investment Bank in London.

"Plenty of scepticism remains, and fiscal retrenchment is a long, hard slog for most peripheral countries," said Mr Jellinek.

"Additionally, trading liquidity has been low. With the summer holidays in full swing, spread volatility should remain an issue for investors." (Additional reporting, Bloomberg)

Irish Independent

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