Irish two-year bonds rose on Wednesday, sending their yield to a record low of -0.5 per cent, as investors continued to react to the head of the European Central Bank’s commitment to support the economy through its unprecedented stimulus measures.
While markets have priced in the likelihood of the US Federal Reserve increasing interest rates next month, with some analysts predicting a further three hikes in the next two years, ECB president Mario Draghi moved earlier this week to reassure investors that his organisation is committed to maintaining its loose monetary policy stance.
The market is "seemingly playing catch-up to the accommodative Draghi and ECB comments on Monday," Jim Reid, a strategist at Deutsche Bank, said in a note.
Stimulus plan
Mr Draghi’s comments followed a sell-off in bonds globally following Donald Trump’s election as the next US president two weeks ago, which was driven by speculation that his plans to push through a massive stimulus plan would lift inflation and lead to an acceleration of interest-rate increases.
The yield on Germany’s two-year bonds also slid to a 0.744 per cent on Wednesday, the lowest since at least 1990.
The negative yield on short-term debt implies that if the Irish Government sold two-year bonds, investors would have to pay it a rate of 0.5 per cent for the privilege of holding their money.
The focus among investors in euro area debt is whether the ECB will tweak its €80 billion monthly bond-buying programme to ensure it doesn’t run out of securities to buy.
ECB purchases
Current ECB rules mean the central bank cannot own more than 33 per cent of any single bond issue or of a country’s total debt, which resulted in ECB purchases of Irish and Portuguese bonds beginning to lag other euro zone members earlier this year.
The ECB may move in the coming months to extend the lifetime of the bond-buying programme, known as quantitative easing, by six months beyond its scheduled end in March 2017, according to analysts. Many also see the issuer and issue restriction rising from 33 per cent to 50 per cent.
The ECB cut its main interest rate to zero for the first time in March under its efforts to boost inflation and the wider economy.
