Stimulus expectations reduce debt costs to new low

The State borrowed €1bn at an all-time-low cost yesterday as bond investors piled into the market in anticipation of a renewed transatlantic stimulus boost.

The National Treasury Management Agency (NTMA) issued €1bn of new debt in a mix of 10-year and 15-year bonds. The yield on the 10-year bonds, in practice the interest investors will get per year, was at an all-time-low cost of 0.136pc.

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The interest on the 15-year bonds was also a record low – under half of one per cent per year.

The auction means the NTMA will have secured €11.25bn of its target for the year of borrowing €14bn to €18bn.

Investor demand for eurozone government debt is extraordinarily high, in part because the European Central Bank has already pumped a €2.6trn ocean of cash into the market by buying up bonds, and because low inflation figures have raised expectations that it will do even more.

Yesterday, ECB board member Benoit Coeure sounded a note of caution on that score, citing “tentative evidence” that households’ predictions were not as dour as markets’ downbeat outlook for inflation suggests.

“The pessimism priced into bond markets today may not necessarily presage downward pressure on inflation tomorrow – at least not to the same extent,” said Mr Coeure, the ECB’s head of market operations.

The market-based inflation expectations have plunged this year and ECB president Mario Draghi has pledged he will add monetary stimulus if the outlook does not improve.

With economic reports mixed at best, investors are betting the central bank will further cut rates, already at a record low, by September.

Speaking in Frankfurt yesterday, Mr Coeure said an analysis by ECB staff suggested that market-based measures are more in line with survey-based data, when risk premiums are factored in.

Unlike investors, households’ inflation expectations have stayed stable since January and are still close to a six-year high.

“All this confirms the need for central banks to consider and analyse developments in a broad set of inflation expectations indicators,” said Mr Coeure, who was a driving force behind quantitative easing when it was introduced.

Economists mostly expect the ECB Governing Council to change its policy language at its July 25 meeting to show that rates might fall – the current wording says they will stay at “present levels at least through the first half of 2020” – and it may cut the deposit rate by 10 basis points to minus 0.5pc in September.

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