The price the Irish government would have to pay to borrow on the bond market has almost doubled in less than a month since the successful operation to raise 3.5 billion euros from investors.
The National Treasury Management Agency (NTMA) borrowed 3.5 billion euros on January 13 at an interest rate of 0.387 pc.
Yield – or yield – bondholders are now demanding, and getting, to hold those same bonds soared to 0.719pc.
Much of the sharp rise happened in just a few days – between February 2 and 4, as investors reacted to growing belief that the European Central Bank will act more aggressively to fight inflation.
Borrowing costs are now roughly the highest in five years, having fallen so low last year that at times lenders were actually paying to lend to Ireland, particularly for short periods.
The €3.5 billion borrowed by NTMA in January was part of an overall goal to borrow up to €14 billion this year.
Ireland is no exception. Germany is considered the safest bet in the European bond market. Last week, the yield on his five-year bond turned positive, meaning he has to pay to borrow again. The same is true for all major European economies.
While much of the public focuses on the ECB in its role in setting interest rates, Frankfurt Bank has become the biggest buyer of bonds issued by Irish governments and other governments in the euro area in recent years.
Over the past two years, this has included buying 50 billion euros a month of bonds through the Pandemic Emergency Purchase Program (PEPP). The PEPP gobbled up €23 billion worth of Irish government bonds.
The PEPP will be withdrawn next month, which will reduce the amount of liquidity in the bond market, which should weigh on prices and therefore increase yields. The ECB has already pledged to reduce the scale of other ongoing bond-buying programs over the course of this year, before tackling interest rates.
“German two-year yields will soon turn positive,” said Antoine Bouvet, senior rates strategist at ING Groep NV. “It’s a runaway train with the next stop at 0pc, and it signals that the era of negative yielding debt is nearing the end of the line.”
This is bad news for governments that have significant financing needs. NTMA, which borrows on behalf of the Irish government, has a relatively light funding requirement this year, although deficits in 2020 and 2021 pushed the national debt to a record high of €243bn earlier this month.
In information provided to bond market investors in January, the NTMA said the total budgeted cost of the Irish government’s Covid response was €48bn, but not all the money allowed was expected to be used, largely because taxes resisted and even increased. during the pandemic and with most supports now about to end and employment on the rise.
The NTMA said that relative to the size of the economy, Irish spending was 23%, more than double that of Sweden, similar to France and Singapore but lower than the United States and well below the UK or Germany. Direct supports provided by the government here to households and businesses were relatively high, while indirect supports were lower than peers.