Irish borrowing costs hit bailout-era highs as investors up bets on rate hikes

Irish government borrowing costs spiked on Tuesday at their highest level since late 2013 – when the State was coming out of an international bailout programme – as debt investors upped their bets on a raft of European Central Bank (ECB) rate increases over the next 12 months. The market interest rate – or yield – on 10-year government bonds rose to as high as 3.68 per cent during European trading, marking an increase of 0.2 percentage points in one week as soaring energy prices have heightened fears about inflation and what central banks will do to rein it in. The yield on the Irish benchmark bonds stood at about 2.9 per cent in late February, before the US and Israel attacked Iran, setting off a months-long conflict. Irish 10-year yields are more closely correlated to those on German bunds, which serve as the main yardstick for measuring borrowing costs across the entire euro zone, than at any stage in the past two decades. Bunds rose to as high as 3.57 per cent. Yields on US treasuries hit their highest level since 2007 in advance of the Federal Reserve meeting on Wednesday, with futures markets putting a 95 per cent probability on the central bank raising rates. The Bank of England is expected to keep rates on hold on Thursday but signal increases before the year end. READ MORE“The ongoing conflict in the Middle East, which has had a large effect on energy prices, the blistering hot summer, which will drive up food prices, and talk of large borrowing in bond markets by the tech sector have pushed 10-year and longer government borrowing rates higher,” said Garret Grogan, head of Goodbody Stockbrokers’ fixed-income, or bond, desk. “One of the many things central banks have to worry about is inflation and the one thing they will not tolerate is even the risk of hyperinflation, which history has shown us leads to social unrest.”Money markets are now pricing four more quarter-point rate rises from the ECB over the next 12 months, following two rate rises since mid-June, according to Bloomberg data. This points to a more aggressive path than the consensus view among economists for just one or two more increases – and a reiteration from the ECB last week that it won’t pre-commit to further steps, after its latest hike. Oil prices are hovering around a four-month peak, with Brent crude standing at more than $108 a barrel, after Iran-backed Houthi forces in Yemen launched a new wave of attacks on Saudi Arabia on Monday and talks between Gulf states and Iran were postponed.The National Treasury Management Agency (NTMA) is expected to go to the market with one more bond sale this year – either in October or November – having raised €10.9 billion in the long-term debt markets so far this year. It has a full-year objective of raising between €10 billion and €14 billion. [ Interest rates are rising. Here’s what it means for your moneyOpens in new window ]NTMA chief executive Frank O’Connor had already warned in early July – when the 10-year yield was half a point lower – that the agency’s annual interest bill was likely to double to “somewhere in the region of €6 billion” by the early 2030s.This will come from the NTMA having to refinance debt at higher rates and government borrowings being poised to rise from €210 billion at the end of last year to “close to” €250 billion.The agency will need to go from refinancing almost €9 billion of debt next year to about €20 billion in both 2030 and 2031, the highest levels in about a decade, including initial repayments of European Financial Stability Facility (EFSF) loans granted during the State’s international bailout 16 years ago.The NTMA is continuing a strategy of holding large amounts of cash. It had a cash balance of €25.1 billion at the end of June, according to an investor presentation on its website. Meanwhile, State-owned Gas Networks Ireland was braving turmoil across the debt markets on Tuesday as a group of investment banks and securities firms marketed a planned €300 million bond sale by the company.