Cantillon: no signs of uncertainty in Irish bond rates

If the markets are getting nervous about the Irish election, they certainly aren’t showing a lot of signs of it yet. Yesterday the 10-year Irish bond, launched in January in a fanfare at a low interest rate of 1.16 per cent, was trading below 0.95 per cent. Even the investors who bought in when €1 billion of the bond was auctioned earlier this month at just below 1 per cent are in the money.

Strange times indeed, with the bond markets encouraged yesterday by signs in ECB minutes published on Thursday of easier monetary policy and by a bigger-than-expected decline in German producer prices.

Deflation continues to stalk European economies and 10-year German bond yields were trading at about 0.18 per cent yesterday – even worse than the returns you might get on a deposit in an Irish bank.

German producer prices fell 2.4 per cent in January from a year earlier, a bigger drop than expected. The markets are now expecting the ECB next month to reduce its deposit rate – which it pays banks who leave money with it overnight – from minus 0.3 per cent now to minus 0.4 per cent. Another drop is expected later in the year. Shorter-term bond yields, including for Irish bonds, are also now firmly in negative territory.

The worry, of course, is that the ECB runs out of bullets. Mario Draghi continues to say he will do all that is necessary, but behind the scenes, a powerful group led by the Bundesbank already feels the ECB has gone too far. It remains to be seen how much further Draghi can bring his colleagues and whether the scale of medicine which he can possibly deliver is able to start to revive the patient and to move growth and inflation back to anything resembling normality.

Markets remain worried and after a better week, share prices were back in the red yesterday.

Provided Ireland can retain market confidence, it looks like super-low bond interest rates could remain in place for some time yet. It remains to be seen how this plays out after the general election.