The great quantitative-easing (QE) experiment finally kicked off yesterday, with the Central Bank of Ireland among the euro-zone central banks buying national bonds. European bond yields are at extraordinarily low levels, with Irish 10-year bonds trading at about 0.85 per cent yesterday and German 10-year yields dropping to 0.32 per cent.
If QE works, then, at some stage over the next year or so, yields should start to rise as investors’ expectations for future inflation increase. But for the moment the ECB’s promise to “buy, buy, buy” looks set to keep bond yields down.
This is good news for the Government, as the cost of new borrowing remains on the floor. The National Treasury Management Agency (NTMA) had already signalled back in January that it would hold an auction to raise new debt this Thursday, but the timing should now work well. The NTMA will auction another €1 billion of a 30-year bond it first launched in early February. Back then, it raised €4 billion at a rate of just over 2 per cent. With the market moving ahead in the meantime, the additional borrowings being raised this week should cost less than 2 per cent.
After Thursday, the NTMA will have raised €9.5 billion on the markets this year, a significant part of its annual target of €12 billion to €15 billion. This means there will be limited new supply from the NTMA over the rest of the year, and continued central bank buying of Irish bonds under QE at an average rate of around €700 million a month. So the market should remain well supported.
Still, you would have to think that if signs of growth and reviving inflation in Europe do appear, then the bond bubble could burst pretty quickly and long-term interest rates could head higher. For this reason, it seems to make sense for the NTMA to keep hoovering in the cash from borrowing, even though the exchequer already has a massive €19 billion in cash.
Nobody knows when bond interest rates will start to head higher. QE may delay the day this happens. But the lesson of market history is that when these trends turn, it can all happen very quickly.
