Ireland caught up in international bond market sell-off

Irish Government bonds have fallen sharply after the election of Donald Trump as the US president-elect spurred a major sell-off in international bond markets.

Ronan Reid, chief executive of Cantor Fitzgerald Ireland, described the bond market plunge as "the biggest bond correction in several years".

A Trump presidency, investors believe, will lead to higher US government demand for debt, driving up prices, while even oil-rich Saudi Arabia has become active in the bond market recently.

“Governments now realise they are going to have to borrow and spend to get their economies moving,” said Mr Reid. “The industrial unrest in Ireland also means the State is probably going to have to borrow more in future.”

“Populism is back, but nobody has figured out the price of it,” Mr Reid added.

As investors bet that Mr Trump’s expansionary policies will push up inflation and interest rates, large amounts of cash flowed out of bond markets this week, driving Irish prices to their lowest level since February.

The interest rate on Ireland’s 10-year bonds closed the week at more than 0.98 per cent, up from 0.64 per cent a week ago. The gap between interest rates for Irish and German bonds has also widened sharply. If the trend continues, it will push up the cost to the State of new funding for the national debt next year.

Italy was among the nations worst hit on Friday. The Trump election has changed expectations globally for interest rates and some now believe that the long era of very low rates could be gradually ending.

‘Tectonic shift’

The election of Donald Trump represents a "tectonic shift" for global economics and politics, and will help kill the three-decade bond market rally, according to Henry Kaufman, the original "Dr Doom".

The former Salomon Brothers chief economist gained his gloomy moniker by correctly calling the last bond bear market in the 1970s. He is now predicting another, as Mr Trump will probably fire a massive slug of inflationary government spending and hawkishly reshape the US Federal Reserve in coming years.

"We have already seen a burst higher in long-term interest rates. I would say the secular trend is going to be upwards now," he told the Financial Times. "Secular swings are hard to forecast, but the secular sweep downwards in interest rates is over and we are about to have a gentle swing upwards."

He doubted that the Federal Reserve would allow bond yields to rise quickly or too high, given that global indebtedness remains elevated, but did not see much chance of them falling.

“To get a move downwards would require a significant downshift in the economy, a recession, and I cannot see one coming,” he said.

Additional reporting: The Financial Times Limited 2016