The implied cost to the government of borrowing in international debt markets fell significantly yesterday as traders limited their expectations for rate hikes from the European Central Bank over the next few months.
The yield, or interest rate, on the Irish 10-year bond traded at 1.83%, down during the session, and down sharply from the 2.4% yield there. less than a month.
Falling yields imply the government would have little difficulty raising funds this year, but also reflect market assessments that the eurozone could face a recession if Russian gas supplies to Germany and the rest of Europe were reduced during the autumn and winter months.
Ireland now has relatively cheap borrowing costs in Europe.
The 1.83% yield on the 10-year bond is slightly cheaper than Belgium’s and almost the same as Austria’s, according to market figures from Trading Economics.
It also compares to the yield of 1.78% for France, the cost of 1.57% for the Netherlands and 1.24% for Germany. However, it is much cheaper than Italy’s 10-year bond yield of 3.32% and Spain’s 2.34%.
Market interest rates for eurozone government bonds had climbed a year ago on expectations that the European Central Bank would begin to aggressively raise official interest rates, starting at its meeting of the next week to prevent inflation from spiraling out of control.
In the case of Ireland, the yield on the 10-year bond was trading near zero a year ago.
However, amid concerns over the disruption of Russian gas supplies triggering a recession in Germany, traders now expect the ECB to not hike rates as high as once feared.
Dermot O’Leary, chief economist at Goodbody, said Ireland’s borrowing costs had risen from the so-called eurozone periphery, as the robustness of the economy was demonstrated during the crisis of Covid-19.
Investors await U.S. inflation data on Wednesday, which could force another massive hike in U.S. interest rates by the U.S. Federal Reserve.
All eyes will then be on the ECB meeting next week.
“A crucial litmus test for the tightening scheme could, however, take place much sooner, with the planned end of Nord Stream 1 maintenance expected to end a day after the ECB’s take-off decision,” analysts said. the Commerzbank in a research note.
Germany does not know how much gas Russia will pump through the Nord Stream 1 pipeline after the end of a 10-day maintenance shutdown that began on Monday, the German energy regulator told Reuters. ECB policymakers have pledged to buy more bonds from indebted countries such as Italy to contain a growing gap between their borrowing costs and those of Germany, which could hamper the transmission of monetary policy through the block.
Bundesbank chief Joachim Nagel disagreed with the move and warned against trying to decide on the right market allocation as it was ‘practically impossible’ and risked making governments complacent , according to sources. Help from the ECB to tackle rising government debt yields in some eurozone countries should come with strings attached, an adviser to German finance minister Christian Lindner said.
- Additional Reuters reports