Thursday 18 January 2018

State's long-term borrowing costs fall below UK for first time in five years

Building materials sit outside the main entrance to the European Central Bank's (ECB) new headquarters during construction alongside the Grossmarkthalle wholesale fruit and vegetable market hall in Frankfurt, Germany. Photographer: Martin Leissl/Bloomberg
Building materials sit outside the main entrance to the European Central Bank's (ECB) new headquarters during construction alongside the Grossmarkthalle wholesale fruit and vegetable market hall in Frankfurt, Germany. Photographer: Martin Leissl/Bloomberg
Donal O'Donovan

Donal O'Donovan

IRELAND'S long-term borrowing costs have dropped below the rate being charged to the UK on the markets for the first time in five years.

The fall in borrowing costs means that investors would lend to our government for 10 years at an interest rate of 2.657pc. The UK would pay 2.685pc and the US 2.617pc.

While it's good news in terms of the absolute cost of new debt for the State, the higher interest rate investors are demanding from the UK really reflects the stronger growth there and the effects of sterling as a standalone currency.

Still, it is a far cry from mid- 2011, when the notional borrowing cost for the State was as high as 14pc.

The latest drop in the cost of borrowing came after investors snapped up €750m of Irish 10- year bonds at an auction on Thursday.

In January, Ireland's shorter term five-year borrowing costs dropped below the UK rates for the first time since the global financial crisis.

Yesterday, Irish Government five-year bond yield's were just 1.035pc on the markets – about a fifth of what small and medium-sized businesses are being charged for loans. Yields on UK five year bonds were 1.99pc.

Historically, it is not unusual for Irish borrowing costs to rise and fall below those in the UK – but in the period following the financial crash the rates diverged radically in the UK's favour.

Yields, or returns sought by investors on UK and US bonds, are relatively high at the moment because central banks in both countries are expected to raise official interest rates on the back of economic growth. That will effectively limit the flow of loose money, depressing asset prices and driving up yields.

In contrast, the European Central Bank is expected to do more over this year to try to stimulate the lacklustre eurozone, so investors are betting on a greater supply of loose cash.

"There is downward pressure on Irish yields in combination with at least some upward pressure on UK ones," said Owen Callan, an analyst at Danske Bank. "Low inflation, slow but positive growth, and lack of ECB tightening in the coming years supports lower yields and further spread compression, so eurozone bonds are a buy, generally. In the UK, the recovery, and nominal growth expectations, are much more advanced," he said.

The cost of insuring Irish bonds against the risk of a default by buying through credit default swaps (CDS) remains far higher than the cost of protecting UK bonds. CDS is a measure of investors' risk perception that is not affected by currency differences. CDS on Irish debt fell to 0.60pc, down from 1.20pc at the start of the year, but well over twice the cost of insuring UK bonds, according to Bloomberg data.

Irish Independent

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