The cost of new government borrowing is increasing in advance of proposed hikes in interest rates as yields on bonds turn positive across debt markets.
verage yields have more than doubled this year to 0.5pc as investors prepare for the withdrawal of the European Central Bank as a net buyer of government issuance later this year, according to the National Treasury Management Agency.
While the cost of borrowing remains historically low, the long period of virtually free money that enabled the Government to easily source billions for Covid support measures is coming to an end.
Ireland – along with much of the world – is now facing a period of high inflation, central bank tightening and economic uncertainty, which is causing bond investors to demand a greater risk premium.
“Yields are rising and Ireland’s borrowing costs for new issuance will be higher,” said Eddie Casey, chief economist with the Irish Fiscal Advisory Council.
“There are of course risks to growth, including from the impacts of the war on Ukraine, and debt remains high, which tends to magnify the impact of growth shocks, so it is important to avoid complacency.”
The NTMA announced at the beginning of the year that it planned to issue €10bn-€14bn in new debt in 2022. It has raised €4.5bn of that already, albeit at a slightly higher price than the €20bn it borrowed last year.
While Ireland’s high level of debt at 106pc of GDP does increase the risks from higher interest rates, the State’s finances are also well-insulated from possible shocks or higher debt costs.
The NTMA has built up large cash balances of €27.5bn and Ireland’s existing debt mostly has long maturities, meaning little of it falls due in the near-term.
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Moreover, Government deficits have come in smaller than expected as Finance Minister Paschal Donohoe is sticking to tight spending limits to bring down debt ratios, assisted by strong increases in corporate, income and value-added tax receipts.
Yet the economic backdrop carries risks.
This week the Federal Reserve is expected to increase US interest rates by half a percentage point, an aggressive move to tamp down inflation that will ripple across global bond markets.
The UK is also poised to make its fourth quarter point increase this week.
ECB president Christine Lagarde is sure to follow, with most analysts expecting a eurozone rate increase to follow the end of quantitative easing in the third quarter.
But rampant inflation of 7.5pc has prompted more conservative members of the ECB governing council to agitate for rate hikes as early as July.
“This worsening economic outlook could also explain why some ECB members seem to be in a rush to hike interest rates,” said ING global head of macro Carsten Brzeski.
“The fear seems to be that the window of opportunity to end net asset purchases and start the rate lift-off could be closing rather soon. This is why we can no longer exclude a first rate hike in July.”
Bond markets have followed the direction of travel, with yields ticking up across corporate bonds this year, pushing the entire market into positive territory for the first time in years.
The NTMA faces its next pricing test on May 12 when the agency is back with a benchmark bond auction.