INTEREST RATES on State borrowing fell to their lowest levels in two years yesterday as markets continued to respond positively to the European Central Bank’s decision to buy troubled euro zone countries’ bonds.
In his latest initiative to stem the EU’s sovereign debt crisis, ECB president Mario Draghi announced on Thursday that the bank would buy unlimited quantities of bonds issued by weakened euro-zone states once they pledged to meet strict conditions.
The move boosted investment markets on Thursday and the pattern continued yesterday as leading stocks across Europe gained further ground to complete their strongest week-long rally in three months. It also reduced the interest rate charged on Irish government bonds, knocking one-fifth of 1 per cent off their yields.
At the close of business yesterday, the yield on the benchmark nine-year Irish government bond had fallen by 21 basis points – hundredths of a per cent – to 5.48 per cent, its lowest level in two years – the period leading up to the €67 billion bailout by the ECB, IMF and EU troika in 2010.
While the State now borrows largely from the troika, the fact that Irish bond yields are falling raises the possibility that the Government may be able to return to capital markets when it is raising money next year.
The yields on debt issued by other troubled euro zone countries Italy and Spain also fell yesterday. Italian yields declined 15 basis points to 5.11 per cent, driving the yield premium to German bonds to its lowest in five months, while Spain’s benchmark 10-year bond fell below 6 per cent for the first time in four months.
Market analysts agreed yesterday that Mr Draghi’s move seemed to have convinced markets. Johannes Jooste, a senior strategist with Merrill Lynch Wealth Management in London, said it was the first time the ECB seemed to be taking control of the situation. “The initial market reaction suggests it has faith in Draghi,” he said.
Stock markets ended the week on a high. In Dublin, the Iseq index of Irish shares closed 1.67 per cent up at 3,261.9. The gain added more than €1 billion to the total value of the stocks traded on the market.
In Europe, the Dow Jones Stoxx 600, which tracks leading shares in 18 western European markets, was up 0.2 per cent to 272.07. The index gained 2.3 per cent this week.
However, David McNamara, an analyst with Dublin stockbrokers Davy, sounded a note of caution in the firm’s weekly outlook, published yesterday, and suggested the ECB’s actions would do little to spur the real economy in the near future. He argued that the overall euro zone economy was likely to shrink further in the third quarter of this year.
Mr McNamara pointed out that Europe-wide indicators published this week, such as the composite purchasing managers index for August, industrial production and July retail sales all pointed to further economic deterioration.
“Short-term indicators paint a bleak picture for euro zone growth in the second half,” he said.
