Draghi’s Bond Rally Means Ireland Borrows for Free: Euro Credit

Four years ago, Ireland had to be bailed out by its European Union partners. Today investors are paying to lend it money.

Ireland joined nations from Germany and Austria to Finland as its two-year note rate dropped below zero for the first time. Irish 10-year bond yields also declined to a record along with Italy’s after European Central Bank policy makers yesterday cut their key interest rate and signaled at least 700 billion euros ($907 billion) of aid to support the flagging euro-zone economy. A report today confirmed the region’s recovery ground to a halt in the second quarter.

Negative yields reflect “ECB policy but also reflect a mounting belief in the lack of positive prospect for the European economy,” said Luca Jellinek, head of European rates strategy at Credit Agricole SA’s investment banking unit in London. “This is good news for the periphery.”

Ireland’s two-year yield fell three basis points, or 0.03 percentage point, to minus 0.007 percent as of 4:15 p.m. London time, the lowest since Bloomberg began collecting the data in 2003. The 4.6 percent note due April 2016 rose 0.035, or 35 euro cents per 1,000-euro face amount, to 107.385.

A negative yield means investors buying the securities will get less back than they paid when the debt matures.

Yield Surge

Ireland’s two-year yield surged to as high as 23.503 percent in July 2011, less than a year after the nation sought a 67.5 billion-euro bailout as its banks came close to collapse in the wake of western Europe’s worst real-estate market bust.

Two-year rates are also negative in Austria, Belgium, Finland, France, Germany and the Netherlands, as well as non-euro nations Denmark and Switzerland, according to data compiled by Bloomberg.

Policy makers cut the ECB’s refinancing rate by 10 basis points to 0.05 percent yesterday and reduced the deposit rate, the charge levied on banks to park cash at the ECB overnight, to minus 0.2 percent.

Euro-area money-market rates were near records after sliding in the build-up to the ECB’s meeting on bets for lower borrowing costs. Three-month swaps on the euro overnight index average, or Eonia, dropped as low as minus 0.0803 percent yesterday, the least since at least 1999. It was at minus 0.065 percent today and rates out to three years were negative.

Negative Yields

“Optically, bond yields in negative territory seems wrong but if the repo rates on them are significantly negative it drags all bond yields close to zero and through,” said Bert Lourenco, head of EMEA rates research at HSBC Holdings Plc in London. “This has happened to Ireland, so potentially it can continue to happen with the other euro-zone issuers.”

Ireland’s 10-year yield slid as much as 11 basis points to 1.635 percent, while Italy’s tumbled to as low as 2.257 percent. Benchmark German 10-year bund yields fell three basis points to 0.94 percent.

Greece’s 10-year rate dropped as much as 15 basis points to 5.52 percent. That’s the lowest level since January 2010, three months before the nation requested its 45-billion-euro bailout from the EU and International Monetary Fund.

Gross domestic product in the 18-nation currency bloc in the three months through June was unchanged from the first quarter, when it increased 0.2 percent, the European Union’s statistics office in Luxembourg said today. The reading confirmed Eurostat’s Aug. 14 estimate.

Euro-area government securities returned 10 percent this year through yesterday, almost four times their 2013 return, Bloomberg World Bond Indexes show. Ireland’s have earned 12 percent and Germany’s 6.8 percent.

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