QE set to drive Irish yields to French levels
Ireland's borrowing costs are being tipped to fall as low as those for France and Belgium, as the European Central Bank (ECB) goes on a massive €14bn spending spree here.
So-called "peripheral" Eurozone governments have already emerged as the main winners as ECB President Mario Draghi prepares to pull the trigger on a massive €1.1 trillion quantitative-easing (QE) plan later today.
The plan is due to come into effect this month, but traders say the ECB is not yet being seen in the market. They expect further details of how the plan works to be announced today at a meeting in Cypus.
"Our view is that you'll start to see the ECB buying from next week, after the meeting (of its governing board)," Ryan McGrath, a trader at Cantor Fitzgerald, said.
Based on guidance from the ECB he expects the European Central Bank to spend €35m a day on Irish assets, once the QE plan is up and running.
Irish government borrowing costs are already at a record low but Ryan McGrath "absolutely" expects the gap between our borrowing costs and those for the French and Belgian governments to be eroded as the bond buying scheme swings into gear.
"It's a matter of when, not if," he said.
Based on prices yesterday Ireland would pay interest of 0.91pc a year to borrow for 10 years, compared to the 0.66pc France would be charged to borrow. Three years ago our debt costs were a mutiple of those for France.
QE will see the ECB print cash to buy up assets, mainly low risk bonds, in an effort to stimulate inflation by forcing private investors to take bigger risks in order to generate returns.
The market is already behaving as though QE was happening, according to Ryan McGrath.
"Investors have been buying up bonds because the QE policy is seen as underpinning the market," he said.
The is driving down borrowing costs dramatically, especially when it comes to borrowing over the longer term.
A 30-year bond issued by the Irish government in the first week of February carried an initial yield or interest rate of 2.088pc. Four weeks later the same debt can be borrowed at a yield of 1.75pc, Mr McGrath said.
It means investors are reaping big returns, the Irish 30- year bonds issued in February was "priced" to be bought by investors at 98.05pc of face value initially, but now trades at 106pc of face vale.
The first formal test of the impact of QE will come when the National Treasury Management Agency (NTMA) issues bonds a week from today at a scheduled auction.
Portugal's debt will fare best under the ECB purchases, according to a survey of the 37 banks.
Ireland will be another top beneficiary of QE, according to analysts at French bank Natixis.
"I would not be surprised if Irish treasuries start to trade on par with France on sub-five year maturities," Natixis' Cyril Regnat said. (Additional reporting Bloomberg)