Spike in bond yields sees Irish borrowing costs hit 2015 high

Swift sell-off in bonds catches most investors by surprise

 Britain’s FTSE 100 index fell 0.8 per cent on the day of an election that could yield a weak government, propel it towards a vote on EU membership and foster Scottish secession .(Photograph: PA Wire)

Britain’s FTSE 100 index fell 0.8 per cent on the day of an election that could yield a weak government, propel it towards a vote on EU membership and foster Scottish secession .(Photograph: PA Wire)

 

After three-and-a-half years of near constant decline, Irish bond yields are on the rise again amid an unprecedented global sell-off in government debt.

This week’s spike in sovereign bond yields, which rarely move more than a few basis points in a day, is estimated to have wiped almost half a trillion dollars off the value of bonds worldwide.

At the heart of the rout is a re-evaluation of Europe’s medium-term growth prospects combined with stronger inflation prospects, both of which can be linked to the European Central Bank’s €1.1 trillion stimulus plan, announced in March.

Many traders also pointed to the fact that yields had become unrealistically low in the euro area in recent months and that a correction had been on the cards.

Nonetheless, the speed and strength of the spike has caught many investors off guard.

The stampede from stocks and bonds in recent days has sent European indexes, including Dublin’s Iseq, to their lowest level in two months, albeit most bourses recovered somewhat on Thursday.

Irish 10 year bond yield

Yields on Irish benchmark 10-year bonds today rose 20 basis points to 1.32 per cent, having hit a record low of 0.6 per cent last month.

Irish Government’s borrowing costs, however, remain extremely low by historical standards, and in the context of the recent euro zone debt crisis, which saw yields soar past 15 per cent in 2011.

Equivalent UK gilt yields nudged higher like most global bonds, with fears of an electoral stalemate still weighing UK stocks down.

German 10-year bond yields jumped as far as 0.77 per cent before finding some support. Just a month ago they were at a record low of 0.05 per cent and many were betting the ECB’s trillion-euro bond-buying plan would turn them negative.

“In some ways, the moves simply reflect how unrealistically low yields had become in the euro area,” Goodbody economist Dermot O’Leary said, pointing to a similar market shift in the aftermath of the first US quantitative easing programme, which saw yields jump 2 per cent.

“The open-ended nature of the commitment from ECB president Draghi probably took the market initially by surprise,” Mr O’Leary said.

The second explanation for the upward movement in yields is the fact that the economic data has improved and inflation expectations have picked up, he said.

In its latest monthly debt digest, Davy said: “Reflationary fundamentals are now calling time on the deflationary bond market”.

“An abrupt about-turn in hitherto bullish trajectory of global bond yields, led by a spike in Euroland rates - those outsized gains stemming from the ECB’s QE largesse now completely eradicated,” it added.