Cantillon: Bond yields rattled by British threat

It’s almost four years since Mario Draghi famously vowed to do “whatever it takes” to save the euro. Within months, the ECB had launched its outright monetary transactions bond-buying programme, which, although never used, was enough to kill off talk of the euro’s implosion.

And, last year, it started to mop up tens of billions of euro of bonds in the market every month, pushing borrowing costs down further.

The market interest rate, or yield, on Ireland’s 10-year bonds fell to a low of 0.7 per cent earlier this year from a 2011 peak of over 14 per cent. However, the euro zone bond market is now being rattled by the prospect of the UK leaving the EU.

As a result, the yield on Germany’s 10-year bonds, a safe haven at a time of turbulence, dipped below zero this week for the first time. This means investors, worried about where to put their money, are prepared to pay Berlin for the pleasure of holding it.

However, the yield on similar bonds of Ireland, viewed by most commentators as one of the most exposed to Brexit, travelled in the opposition direction, rising by 0.07 percentage points on Tuesday to 0.83 per cent.

We’ve found ourselves in the uncomfortable company of countries we thought we had long left behind. Greece, Italy, Portugal and Spain also saw their borrowing costs rise this week. Ryan McGrath, head of fixed-income strategy at Cantor Fitzgerald, for one, sees volatility continuing ahead of the crucial UK referendum next week.

While the National Treasury Management Agency (NTMA) has widely decided to keep out of the bond markets this month as Brexit fever rises, it is dipping its toe in the short-term Treasury Bills markets.

Still, it’s important to remember how far we’ve come from when Draghi drew a line in the sand in 2012. The yield on Ireland’s government debt out to 2020 is now below zero. So, there is little doubt the NTMA will get its €500 million bills sale away this morning with rates in negative territory.