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Borrowing costs nudged higher ahead of ECB meeting

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Philip Lane, chief economist at the European Central Bank. Photograph: Alex Kraus/Bloomberg

Philip Lane, chief economist at the European Central Bank. Photograph: Alex Kraus/Bloomberg

Philip Lane, chief economist at the European Central Bank. Photograph: Alex Kraus/Bloomberg

Ireland will look to borrow €1bn to €1.25bn on Thursday just ahead of a meeting where the European Central Bank may act to slow down its massive bond buying programme.

The National treasury Management Agency will hold a bond auction on Thursday of debt due to be repaid in 2031 and 2041.

The latest borrowing is in addition to €14.75bn raised so far this year on the bond market of an adjusted target of €18bn to €20bn.

The large scale of borrowing being undertaken this year and last is driven by Covid spending commitments, in particular income and wage supports.

Borrowing this year has been at an all time low cost, with an average yield, or interest bill, of just 0.13pc on new long term debt and some borrowing commanding so called negative interest rates .

That has been driven in turn by ECB bond buying, including the €1.85 trillion Pandemic Emergency Purchase Programme (PEPP), hoovering up bonds and creating a scarcity value for private investors who need to hold a share of the low risk assets, even if returns are poor. 

However, market anticipation that Europe’s recovery could put pressure on the ECB to relax that level of support hit bond markets yesterday.

Eurozone sovereign bond yields hovered at seven-week highs, meaning investors looked for and got a better return for buying the paper. 

The key driver was strong inflation data last week have put markets on alert that the ECB, which meets on Thursday, could be looking to dial back its massive emergency stimulus.

Traders and investors appeared to be unconvinced by recent comments from ECB chief economist Philip Lane, who has said it was too early for the ECB to start even laying out plans to wind down PEPP and said inflation would have to remain elevated in a sustained way to trigger action by policy makers.

The ECB is expected on Thursday to set the pace of PEPP buying for the fourth quarter of the year, and analysts are looking to read more into that.

"If the only decision we expect the ECB to take is on the pace of the next quarter's worth of PEPP purchases, a spike in inflation and recent hawkish comments have raised the stakes," said ING senior rates strategist Antoine Bouvet.

He added that this now put the focus on the ECB's latest economic forecasts, also due on Thursday.

"The ECB will have to articulate a more constructive economic outlook without giving the impression that a tighter policy stance is on its way, especially as the new strategy was just translated into a new, more dovish guidance," Pictet Wealth Management strategist Frederik Ducrozet said in a note.

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In real terms the slightly more cautious bond market will not unduly impact Irish borrowing costs this week.

Bond yields remain extremely low by historic standards, softening the decision to borrow not just in Ireland but across the euro area.

France's 10-year bond yield briefly rose to 0.001pc, just into positive yield territory but cheap by any standard.

Ireland is not the only country borrowing this week as Spain has mandated a group of banks to help it sell its debut green bond, a new 20-year issue. 

Additional reporting Reuters


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