Irish long-term interest rates hit highest level in 10 months

Irish 10-year bond interest rates have gone back over 1 per cent for the first time since February, as higher oil prices led to speculation of a rise in inflation.

The sell-off was part of a Europe-wide move after a historic deal between the Organization of the Petroleum Exporting Countries (Opec) and other oil producers to cut output caused a 5 per cent surge in crude prices and put reflation trades back on the table.

In Dublin, 10-year yields – or interest rates – rose from just under 1 per cent on Friday to 1.06 per cent in early trading.

Ryan McGrath, head of fixed income strategy at Cantor Fitzgerald, said Irish bonds were being sold as part of an international move driven by the jump in oil prices. The failure of the Bank of Japan to meet its target of keeping Japanese long-term rates below 1 per cent was also a factor in market sentiment, he said.

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Investors are also focused on the expected rise in US interest rates this week as further evidence of a changing market direction.

Portugal, perceived as the weakest link in the bloc, bore some of the heaviest selling, with 10-year yields soaring to 3.91 per cent, their highest level since a February sell-off triggered by worries about the health of European banks.

Downward moves

The

European Central Bank

looks likely to be restricted in the amount of Portuguese and Irish bonds it can buy in the months ahead, as it has already bought close to its limit in these markets under the rules of its quantitative easing programme. This could leave them vulnerable to downward moves in the market.

Germany's benchmark 10-year bond yields jumped 7 basis points to 0.42 per cent. Oil prices shot to their highest levels since mid-2015, climbing above $57 a barrel on Monday, after Opec and other producers agreed to jointly reduce output in order to rein in oversupply and prop up markets.

“If even non-Opec countries are joining the oil output cuts, there is a pretty good chance we get a deficit in oil supply,” said Rene Arecht, a rates strategist at DZ Bank. “This is why bond markets are now pricing in a higher inflation risk.”

Most euro zone government bond yields were 5-10bps higher on the day, while US 10-year treasury yields rose above 2.5 per cent for the first time since October 2014.

A market gauge of euro zone inflation expectations, the five-year, five-year breakeven forward, extended its rally to a one-year high above 1.73 per cent.

In another sign of the reflation trade, breakeven rates – the gap between yields on five-year US debt and a matching tenor in inflation-protected securities – was at two-month highs, indicating markets are expecting inflation to accelerate.

Additional reporting Reuters