Irish cost of borrowing falls to record low

Yields on Irish 10-year government bonds sank to a record low of 0.363 per cent on Tuesday, shedding two basis points, as peripheral bonds rallied across Europe on the back of expectations of further monetary easing in the United Kingdom.

Irish 10-year yields have plunged from 0.825 per cent at the start of July as markets reacted to the UK’s decision to leave the European Union, amid rising expectations of further monetary easing.

Spanish rally

Across Europe, peripheral bond yields were on the slide. The yield on Spain’s benchmark 10-year bonds hit an all-time low on Tuesday, with the hunt for returns outweighing concern over the fact that the country has had no government for more than eight months. Spain has become the focus of a steady rally in peripheral euro zone bonds, and its yields have dropped as much as 73 basis points since re-run parliamentary elections on June 25th to Tuesday’s record low of 0.973 per cent.

“All peripheral bonds are rallying because of a hunt for yield, but Portuguese bonds are scarce and Italy has issues around the banking sector. So Spain is benefiting,” said Jaime Costero, interest rates strategist at BBVA.

Italian bonds

Italian and Portuguese yields have also fallen in recent weeks, but not to the same extent. Italian bonds were pegged back on Monday after ratings agency DBRS put Italy’s rating under review, casting doubt on whether it will retain its last “A” rating from a major agency. DBRS said it decided to review the ratings outside its usual calendar because of political uncertainty linked to a forthcoming referendum, pressure on banks, a fragile economic recovery and a less stable external environment.

Portugal, meanwhile, has only one investment-grade rating: BBB (low) from DBRS. A downgrade would make it ineligible for the European Central Bank’s quantitative easing programme.

However, all of these issues are largely mitigated by central bank easing both within the euro zone and outside it, said Antoine Bouvet, rates strategist at Mizuho. “I expect peripheral bonds to rally further thanks to low volatility and central bank support for this asset class globally,” he said. – (Additional reporting: Reuters)