Higher cost of bonds sparks rate hike fears
GOVERNMENT borrowing costs shifted sharply higher yesterday as investors reacted to anticipated inflation increases by demanding higher returns to lend to the State.
The National Treasury Management Agency (NTMA) borrowed €1.25bn on the bond markets yesterday, with the yield, or effective interest cost, crossing above the 1pc mark to borrow for 10 years.
At the start of January the State was able to issue 10-year bonds with a yield of 0.943pc.
Borrowing costs remain at historically low levels, but the trend is now seen to be rising with implications for the entire economy.
“It does certainly looks now as if rates are getting ready to go higher,” said Ryan McGrath, a bond market analysts at Cantor Fitzgerald in Dublin. Inflation is up in the United States and in the United Kingdom, he said.
With rising inflation expectations globally, investors are predicting central banks might tighten policy faster.
“Even if it’s lagging in Europe the rates are going to go higher,” Ryan McGrath said.
“We were always going to be looking at higher rates at some stage,” he added. The NTMA auctioned €800m of bonds due to be repaid in 2028 and €450m of bonds due in 2037. The yield investors demanded to lend for
10 years is 1.113pc, compared to
1.59pc a year to lend until 2037. Unlike the rise in State borrowing costs after the crash, rises now are ultimately a healthy sign of the economy, Davy chief economist Conall Mac Coille said. Irish borrowing costs are moving in line with Germany and other well-regarded borrowers, he said.
However, the potential for an European Central Bank (ECB) rate rise this year has increased, he said, but the expectation remains that it will be next year before there’s an official rate increase.
That has implications for borrowers, particularly those with a tracker mortgage tied to the ECB rate. “For households there’s a horse race now between rising wages and interest rates,” he noted.
Rising inflation is generally driven by higher wages.
In London yesterday Bank of England governor Mark Carney said UK interest rates may need to rise at a steeper pace than previously thought to prevent the Brexit-weakened economy from overheating.
The Bank of England lifted its forecasts for growth and said inflation is projected to remain above the 2pc target under the current yield curve, which prices in about three quarter-point hikes over the next three years.
The governor noted that a key challenge is limited capacity. “It will be likely to be necessary to raise interest rates to a limited degree in a gradual process but somewhat earlier and to a somewhat greater extent than what we had thought in November,” Mark Carney said in a press conference.
The euro area isn’t yet seeing that level of inflation, but has indicated that its quantitative easing (QE) programme, which has suppressed borrowing costs, will end in September.