Estimated government borrowing costs in international debt markets fell sharply yesterday as traders tempered expectations of a rate hike by the European Central Bank in coming months.
The yield, or interest rate, on Ireland’s 10-year bond traded at 1.83%, down for the session, and sharply lower than the 2.4% yield a month ago.
The lower yield suggests the government will not struggle to raise money this year, but also reflects market assessments that the eurozone could face a recession if Russian gas supplies to Germany and the rest of Europe are cut in the autumn and winter months.
Ireland currently has relatively cheap borrowing costs in Europe.
The 10-year bond yield of 1.83% is slightly cheaper than Belgium and almost the same as Austria, according to Trading Economics market indicators.
This also compares with a yield of 1.78% for France, a cost of 1.57% for the Netherlands and 1.24% for Germany. However, this is much cheaper than Italy’s 10-year bond yield of 3.32% and Spain’s 2.34%.
Market interest rates on eurozone government debt rose from a year ago on expectations that the European Central Bank will start aggressively raising official interest rates starting at a meeting next week to stem inflation that is spiraling out of control.
In the case of Ireland, the 10-year bond yield was close to zero a year ago.
However, amid concerns about Russian gas disruptions causing a recession in Germany, traders now expect the ECB not to raise rates as high as previously feared.
Dermot O’Leary, chief economist at Goodbody, said Ireland’s borrowing costs had shifted from the so-called periphery of the eurozone as the economy’s resilience was demonstrated during the Covid-19 crisis.
Investors await Wednesday’s U.S. inflation data, which could prompt another huge hike in U.S. interest rates by the U.S. Federal Reserve.
All eyes will then turn to the ECB meeting next week.
“However, an important litmus test for tightening may come much sooner, as the scheduled end of maintenance on Nord Stream 1 is set to end the day after the ECB’s shutdown decision,” analysts at Commerzbank said in a research note.
Germany does not know how much gas Russia will pump through the Nord Stream 1 pipeline after the end of a 10-day maintenance shutdown that began on Monday, Germany’s energy regulator told Reuters. ECB policymakers have pledged to buy more bonds from indebted countries such as Italy to stem a widening gap between their borrowing costs and Germany’s, which could hamper monetary policy across the bloc.
Bundesbank chief Joachim Nagel disagreed with the decision and warned against trying to determine the correct market spread as it was “virtually impossible” and risked making governments complacent, according to sources. Advisor to the Minister of Finance of Germany, Christian Lindner, said that the ECB’s assistance in combating the rise in the yield of public debt in some countries of the Eurozone should be subject to conditions.
- Additional reporting by Reuters