Interest costs for the state to borrow money have risen this week, but experts say sovereign borrowing costs should not at this stage hurt the government’s ambitions to fund its big spending plans in infrastructure projects in the years to come.
Sovereign yields or interest rates rose for all governments in the euro zone as the European Central Bank signaled an increase in its official rates as it battles to control consumer prices which soared to levels not seen for many decades.
Financial markets have been betting that the central bank will likely be forced to keep raising rates until 2023, as inflation shows no signs of being brought under control anytime soon.
The yield on the Irish 10-year bond closed Friday at 2.16%, up a significant 30 basis points from last week. A year ago, the state could borrow at zero or negative rates, which meant that investors, for security reasons, were prepared to lend their money to Ireland, and many other states in the euro zone, at little or no cost.
The yield of 2.16% for the Irish government to borrow money for 10 years compares to 1.5% for the equivalent bond in Germany. Ireland’s yield is still well below those of Portugal and Greece, two other eurozone countries that required official bailouts during the financial crisis 12 years ago.
However, experts said the government’s ambitious plans to invest heavily in infrastructure are not in jeopardy at current market costs.
They point out that current yields are still lower than the debt that will be refinanced in the years to come.
Meanwhile, the attention of sovereign debt markets has returned to Italian borrowing costs this week, as Italy is one of the most indebted states in the eurozone.
The yield on the Italian 10-year bond traded nearly 3.85% on Friday, significantly above German and Irish levels.
Italy’s cost of borrowing “tends to go in the wrong direction, but there is still some way to go before it becomes problematic,” said Ryan McGrath, head of bond strategy and sales at Cantor FitzGerald Ireland.
On the ECB’s monetary policy, Conall Mac Coille said markets like policy to be credible and “they can test it”.
The sell-off in Europe’s weaker bond markets, such as Italy’s, shows no signs of easing, putting pressure on the ECB to spell out how it plans to contain borrowing costs divergent.
The yield spread between Italian 10-year bonds and their German counterparts widened to nearly 226 basis points, the most since May 2020. The move brings the measure – a key indicator of risk in Europe – closer to a 250 basis point threshold that strategists have previously identified as a “danger zone” that could trigger action from policymakers.
ECB President Christine Lagarde on Thursday underlined officials’ determination to end the so-called fragmentation within the eurozone as she set out plans for a series of hikes from July. But she did not give details of a new tool — like another bond-buying program — that some investors and analysts say is needed.