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State borrows €1.5bn at record-low interest rates

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Yield: Treasury Dock on North Wall Quay, Dublin houses the National Treasury Management Agency

Yield: Treasury Dock on North Wall Quay, Dublin houses the National Treasury Management Agency

Yield: Treasury Dock on North Wall Quay, Dublin houses the National Treasury Management Agency

THE State has borrowed €1.5bn in an oversubscribed series of bond sales, raising money at record-low interest rates to fund emergency pandemic spending.

The National Treasury Management Agency auctioned €500m of bonds maturing in 2027, €700m in 2030 and €300m in 2050. This raised total funds raised this year to €20bn out of a full-year target of up to €24bn.

That money is needed to plug a potential €30bn hole in State finances this year. This deficit is being driven by higher health spending and wage supports to laid-off workers, increased aid to businesses, and a sharp decline in tax receipts.

The 2027 bonds were auctioned at a negative yield of -0.257pc, while the yield on the 2030 bonds was -0.025pc.

This means the bidders in both cases paid more than the bonds' face value to acquire them. When the bonds mature in 2027 and 2030 respectively, the holders will receive less than what was paid for them today.

The -0.257pc yield on the 2027 bond is the lowest yield ever recorded on a bond issued by the State. The NTMA's shorter-term treasury bills issued in recent months have offered yields as low as -0.55pc.

Typically the shorter the term, the lower the risk of non-payment and, therefore, the lower the payout required to ensure that investors snap up the bonds.

Despite the negative payouts, institutional investors still value these bonds as offering a better and more secure deal than keeping funds on deposit in the prevailing negative interest-rate environment for corporate cash. The bonds also can be sold early at a profit should yields turn even more negative than now.

Many investment and pension funds are legally required to maintain holdings in government bonds issued by nations with strong credit ratings. Since last year, the bonds of several European nations, led by Germany and Switzerland, have traded consistently in negative-yield territory.

France issued an inflation-indexed bond this week that drew €16bn of bids for €3bn in available bonds. They offered a record-low yield of -0.63pc.

Ireland's 2050 bonds issued yesterday offer a yield of 0.602pc. This positive payout - though still below expected inflation rates - reflects the increased risk of default over the bond's 30-year time frame.

Irish Independent