The price the Irish government would have to pay to borrow in the bond market has reached its highest level since the pandemic began on Friday, amid a change felt across the eurozone.
Riday’s financial market moves indicate that investors have started to gauge the likelihood of an ECB interest rate hike within 12 months, by 20 basis points or a fifth of a percent.
This is even earlier than the market price before a European Central Bank press conference on Thursday where its president, Christine Lagarde, tried to convince investors, apparently unsuccessfully, that there will be no hike. next year.
His case was further compromised on Friday by new data showing inflation in the eurozone accelerated further before expectations to exceed 4pc for just the second time.
The ECB’s inflation target is 2pc and despite its protests, any overshoot will lead to pressure, including internally, to try to cool the markets by raising interest rates.
Even excluding food and energy, inflation in the euro zone was 2.1 pc.
In the bond market, Greece took the brunt of the backlash, with the yield on its 10-year bond edging up 30 basis points, or 0.30% higher. This implies a higher change in the interest the country will pay the next time it borrows in the bond market.
In the case of Greece, the market move reflects the relatively harsher blow it will take when the ECB ends € 750 billion in support under the Emergency Pandemic Purchase Program ( PEPP), which Ms Lagarde says will perform in March. Greek bonds that are not eligible to be purchased under other ECB support are eligible for PEPP.
Italy, Spain and Portugal also suffered smaller but still relatively large negative swings in their bonds on Friday. In the case of Ireland, movement has been less, albeit at a level not seen since the start of PEPP bond buying last year.
Borrowing costs are still extremely low by historical standards. Friday’s swing means the government would pay 0.34% annual interest to borrow for 10 years. But with Ireland and almost all of its European peers carrying historically high national debt levels, any increase in borrowing costs is potentially painful.
The National Treasury Management Agency (NTMA) here will always be reassured that Irish bond yields move more in line with a peer group including Belgium and Austria rather than with so-called peripheral borrowers like Greece and Italy. But the gap between what investors will be willing to lend to Ireland rather than France has also widened.