Irish 30 Year Bond Issue & Record Low Long Term Eurozone Bond Yields

Irish Government get €4bn 30 year interest only loan at 2%

The Irish government came to the market last week with their first ever 30-year bond for sale, maturing in February 2045 and with a coupon payment of 2%. In the lead-up to the auction it was expected they would try and sell €2 billion. The auction attracted €11.2 billion of orders from over 350 investors, allowing the National Treasury Management Agency to raise €3.92 billion at a price of €98.05 and a yield of 2.088%.

(*Bonds Refresher: In the primary market, the buyer of this bond effectively lends €98.05 to the Irish government in exchange for the Government’s commitment to pay €2 every February. At maturity in February 2045, the buyer will receive the regular €2 plus the “principal” of €100. In this case where the investor holds the bond until maturity he will earn an expected yield of 2.088%. However, the bond will now trade in what is referred to as the secondary market, where investors can buy and sell, with the price changing to reflect market expectations at a point in time.)

To put this interest rate in perspective, let’s go back one year. February 2014, Germany issued a new bond, maturing in August 2046 and with a coupon payment of 2.5%. At the time, the auction only attracted bids of €2.794 billion, less than the maximum €3 billion for sale, meaning the auction was “technically uncovered”. As a result, they were sold at a slight discount to par (100) at an average price of €99.40, with an average yield of 2.53%. So, last week the Irish state was able to borrow at a rate lower than what the AAA Germans could get only just a year ago, with significantly more investors queuing up to lend us money!

German yields have also moved lower over the year

On Friday, the 2046 German government bond closed at a price of €141.65, with a yield of 0.96%. Therefore, buyers of Irish government debt are willing to accept just an additional 1% return per annum above AAA German rates as sufficient reward for the extra credit risk.

Record low long term interest rates: what does it imply?

Generally speaking when central banks and market practitioners look at AAA long term interest rates they decompose them into three components:

• expected inflation over the next 30 odd years,
• the expected path of real short term interest rates: the real rate is the nominal rate adjusted for inflation,
• and a residual component known as the term premium, which is the extra return required for holding a bond maturing in 30 years as opposed to just buying a 1 year bond each year for 30 years.

Therefore, long term European government bond yields are implying that bond investors expect Eurozone inflation to remain below target and short term real interest rates to stay low. As well, they seem to require no extra return for the risk of holding longer maturity bonds. If the market is wrong and the ECB manages to reflate the economy, these bonds could fall sharply in value with yields moving higher. At the moment though, the focus is more on the fact that one big buyer is in play, the ECB.