Irish bond rates reach new low amid talk of aggressive ECB stimulus

The market interest rate on Irish Government bonds plunged to a fresh all-time low on Thursday on talk of more aggressive than expected stimulus measures from the European Central Bank.

The yield on the State’s 10-year bonds, which stood at 1 per cent in January, fell as low as minus 0.147 per cent, meaning investors are prepared to pay to hold the Republic’s money. The yield on similar German bonds hit an all-time low of minus 0.7 per cent.

Olli Rehn, governor of Finland's central bank, said in an interview published during mid-afternoon European trading that the ECB's efforts to reboot a slowing economy should see it announce "substantial and sufficient" bond purchases as well as cut to its deposit rate, currently at minus 0.4 per cent, next month.

“It’s important that we come up with a significant and impactful policy package in September,” Mr Rehn told the Wall Street Journal in the interview. “When you’re working with financial markets, it’s often better to overshoot than undershoot, and better to have a strong package of policy measures than to tinker.”

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Outgoing ECB president Mario Draghi gave markets a clear indication last month that the governing council would ease monetary policy when it meets on September 12th.

Financial markets were rattled on Wednesday as investors digested news that Germany, the EU’s largest economy, had contracted in the second quarter, while China reported its industrial output slowed more than expected in July – adding to evidence that the US-China trade dispute is damaging global trade.

Sell signal

The US bond markets also sent a massive sell signal to equity traders when the yield on the country’s 10-year bonds fell below that on two-year notes for the first time since 2007. This phenomenon, known an inversion of the normal yield curve, is seen as an indicator of an upcoming recession in the world’s largest economy.

European banking stocks have been among the worst affected by increasingly dovish tones coming from ECB governing council members, as their earnings remain highly sensitive to the state underlying economy and interest rate levels. Banks’ lending margins are squeezed in a low interest rate environment.

The Iseq financial index has plunged 29 per cent so far this year, with Permanent TSB leading banks lower in Dublin on Thursday as it dropped 4.8 per cent to 95.2 cents, after falling through the €1 level for the first time since its 2015 initial public offering at €4.50 a share.

"Sentiment towards the banking sector appears to have collapsed in recent weeks as a result of the expectation of fresh monetary policy easing from the ECB next month, as well as a hardening expectation of a disorderly Brexit," said Owen Callan, a banking analyst with Investec Ireland.