We are not safe enough to be “core Europe”, but don’t face the budget challenges to be grouped with the southern Europeans. Irish bonds are firmly “stuck in the middle”, as the recent gyrations in the market have shown. As German bond yields rose in the sell-off over the last couple of weeks, Irish bonds rose too, though the interest rate demanded by investors to lend to us remains well below Italy, Spain and Portugal. Irish 10-year yields are below 1.3 per cent, while Italy and Spain were trading yesterday above 1.7 per cent.
Irish yields remain well above the benchmark German bund, which traded yesterday just under 0.6 per cent, still extraordinarily low, but well above the 0.05 per cent it reached in mid-April. Back then, some €3 trillion in outstanding European government debt was trading at a negative yield,
Various reasons have been advanced for the fall in bond prices since then, including changing inflation expectations. But the more fundamental reason may just be the rise in bond prices had gone too far. If investors paying governments to lend them money sounds a bit mad, it is probably because it is, even with the ECB quantitative-easing programme in place to underpin demand.
The next few weeks will be interesting. If Greek uncertainties grow, money could well flow back into the safety of German bonds, while the peripheral southern European countries could take a hit. Ireland would do well to hold its position against Germany, now a gap of just under 0.7 per cent. The markets do not yet rate us as highly as countries such as Belgium, but we do not seem to be lumped any more by analysts with the southern Europeans.The old Piigs group – Portugal, Ireland, Italy, Greece and Spain, seems to have lost an “I”.
One marker to watch will be the interest in Thursday’s National Treasury Management Agency bond auction. Recent auctions have been snapped up amid huge demand at remarkably low interest rates. This one will sell, too, but it could be the first time in many months we see some rise in borrowing costs of a new issue.
