August 17, 2022

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The price the Irish Government would have to pay to borrow on the bond market...

The price the Irish Government would have to pay to borrow on the bond market has almost doubled in the less than a month since a successful deal to raise €3.5bn from investors.
he National Treasury Management Agency (NTMA) borrowed €3.5bn on January 13 at an interest rate of 0.387pc. 
The yield – or return – bond holders are now demanding, and getting, to hold those same bonds has spiked to 0.719pc.
Much of the sharp rise came in just a matter of days – between February 2 and February 4 as investors reacted to a growing conviction that the European Central Bank will act more aggressively to tackle inflation.
Borrowing costs are now around the highest seen in five years, having dipped so low last year that at points lenders were effectively paying to lend to Ireland, especially for short periods. 
The €3.5bn borrowed by the NTMA in January was part of an overall target to borrow up to €14bn this year. 
Ireland is not an outlier. Germany is seen as the safest bet in the European bond market. Last week the yield on its five-year bonds turned positive – meaning it once again has to pay to borrow. The same is now true for all of Europe’s major economies.
While much of the public focus on the ECB in on its role in setting interest rates the bank in Frankfurt has become the biggest single buyer of bonds issued by the Irish and other euro area governments in recent years.
Over the last two years that included buying €50bn a month of bonds through the Pandemic Emergency Purchase Programme (PEPP). The PEPP has gobbled up €23bn of Irish Government bonds.
The PEPP will be withdrawn next month, reducing the amount of cash in the bond market, which is likely to weigh on prices and so lift yields. The ECB has already committed to reducing the scale of other ongoing bond buying programmes over the course of this year, before it tackles interest rates. 
“German two-year yields will soon turn positive,” said Antoine Bouvet, a senior rates strategist at ING Groep NV. “It’s a runaway train with the next stop at 0pc, and it signals the era of negative-yielding debt is nearing the end of the line.”
That’s bad news for governments with significant funding needs. The NTMA, which borrows on behalf of the Irish Government has a relatively light funding requirement this year, although deficits in 2020 and 2021 did push the national debt to a record high of  €243bn at the beginning of this month. 
In information provided to bond market investors in January the NTMA said the total budgeted cost of Ireland’s government response to Covid was €48bn, but that not all of the money allowed for would have to be used, largely because taxes have held up and even increased through the pandemic and with most supports now set to end and employment rising. 
The NTMA said that relative to the size of the economy the Irish spend was 23pc, more than double Sweden’s, similar to France and Singapore but  below the US and well below the UK or Germany. The direct supports provided by the Government here to households and business was relatively high, while indirect supports were lower than peers. 

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