Bond traders in Dublin have been racking their brains in recent days trying to remember when the National Treasury Management Agency (NTMA) last cancelled a regular €1 billion-€1.25 billion bond auction to go all out with a multi-billion-euro syndicated bond deal.
But the agency’s decision earlier this week to scrap an auction to launch a €3 billion bond deal on Thursday is something of a no-brainer, given where bond yields currently are.
If demand is strong, there’s a real possibility that the deal could be increased in size like a bond sale in January, to €4 billion – meaning the NTMA will have raised €9.5 billion of its full-year target of between €14 billion-€18 billion before the week is out.
The market interest rate – or yield – on Ireland’s benchmark 10-year bonds has fallen below 0.5 per cent this week. That’s less than half the yield at which they were trading a year ago.
A raft of weak economic data across the euro zone has prompted a rally by European government bonds so far this year, amid speculation the European Central Bank (ECB) will have to keep its main rate at zero for longer than anticipated. (When bond prices rise, their yields drop.)
Investec Ireland economist Philip O'Sullivan estimates that the new 2050 Irish bonds will carry a yield of between 1.6 per cent and 1.7 per cent. This would lower the "blended" 2.4 per cent interest cost attached to the Government's current debt pile and lengthen the "weighted average" maturity on Irish bonds, which currently stands at 10-1/2 years.
Factoring in the ECB’s mandate to keep inflation at close to – but below – 2 per cent over the long term (even though it has undershot this target for the past six years despite using all kinds of monetary policy tools to boost prices), O’Sullivan reckons that the new bonds will carry a negative real rate for the Government over their lifetime.
