Irish long-term interest rates surge above 1 per cent

Interest rates on Irish government bonds have hit their highest level in nine months, as a major sell-off in international bond market continues. Interest rates on the benchmark 10-year Irish bond breached 1 per cent this morning, up from 0.98 per cent of Friday and from under 0.7 per cent a week ago.

The international sell-off reflects increasing speculation that a major programme of tax cuts and spending increases by the Trump presidency which push up inflation in the US economy and drive up interest rates. As the global bond rout intensified, US 30-year yields rose above 3 per cent for the first time since January.

Higher bond interest rates reflect expectations of a changing outlook for short-term interest rates. The US Federal Reserve Board is now widely expected to increase US rates in early December, and there is rising speculation of several further increases in 2017.

Bond markets outside the US have also suffered even though there is no expectation of an early move by the ECB to increase short-term rates, against the backdrop of a weak euro zone economy. Market analysts say that the Trump move may signal populist pressures to increase spending elsewhere. However bond prices had reached historic highs and their sharp fall also reflects this.

Irish bonds suffered heavily towards the end of last week, with selling reported from major institutional investors who are seen as long-term holders. Market sources say that the selling on Monday was not quite as heavy, but Irish bonds prices continued to weaken in line with international markets. Bond yields and prices move in opposite direction.

The Irish market did fall as heavily as some other peripheral markets on Monday morning, said Ryan McGrath, head of fixed income strategy at Cantor Fitzgerald, with ten year yields around 1.05 per cent.The European Central Bank is still buying European bonds - including Irish bonds - under its quantitative easing programme. However with an absence of other buyers, prices are still falling.

When Irish bonds price weakened earlier this year, buyers have usually emerged, but “ we haven’t really seen dip buyers this time.” said Mr McGrath, with investors nervously sitting on the sidelines.

The bond sell-off wiped a record $1.2 trillion off the value of bonds around the world last week when Trump won election as US president. Investors moved cash into stocks, leading to the biggest sell-off in global bonds seen for years. Bonds prices had been trading at historic highs after central banks worldwide slashed interest rates in the wake of the financial crisis. Now, with a new presidency set to boost budget spending, US rates are seen to be heading sharply higher.

Pacific Investment Management said the central bank may move three times by the end of 2017.

“Yields will continue to rise over the next year,” said Hiroki Shimazu, an economist and strategist at the Japanese unit of MCP Asset Management in Tokyo. “The fundamentals are very strong, particularly in the US. There are some signs of higher inflation pressures. Trump is pushing this phenomenon.”

US 10-year yields jumped seven basis points to 2.22 per cent. Australia’s advanced nine basis points to 2.66 per cent.The move marks a reversal from four months ago when benchmark Treasury yields fell to a record low of 1.318 per cent.

From Irish Times (14/11/2016)