Home > Financial > Hopes for more ECB action drive Irish yields to record lows

Hopes for more ECB action drive Irish yields to record lows

Written by Business World, on 29th Jun 2016. Posted in Financial

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Borrowing costs across the euro zone fell on Wednesday with Irish, French and Dutch 10-year bond yields hitting record lows on hopes for more European Central Bank stimulus to buffer the fallout from Britain's vote to leave the European Union.

With yields in Germany - the benchmark issuer in the euro area - already in negative territory out to 10 years, investors piled into other euro zone bonds in a search of a return.

Fitch Ratings said on Wednesday the Brexit vote has pushed negative-yielding debt globally to $11.7 trillion, adding the growing amount of long-term bonds with a negative yield underscores the challenges facing investors.

Ireland's 10-year bond yield fell to record low 0.61% , France's fell as low as 0.21% and Dutch yields fell to 0.09%.

"With 10-year German yields in negative territory, investors need a yield elsewhere," said Nordea's chief fixed income analyst Jan von Gerich.

Germany's 10-year yield was trading steady at minus 0.12%. Several banks expect it to fall further as Brexit dents the outlook for growth and inflation, raising the prospect of further policy action from the ECB.

ECB President Mario Draghi said on Tuesday Britain's decision to leave the EU could reduce euro zone growth by a cumulative 0.3 to 0.5% compared to previous estimates over the next three years.

Investors now fully expect an interest rate cut in Britain and the euro zone by the end of this year.

The Brexit vote could also be a drag on the U.S. economy, Federal Reserve governor Jerome Powell said on Tuesday, reinforcing market expectations that the Fed will not hike rates this year and may even be forced to cut them.

Japan's Prime Minister Shinzo Abe, meanwhile, on Wednesday pledged to use all available policy tools to keep the wheels of the economy turning.

The sense of caution and uncertainty helped slow the recent rally in southern European bond markets. Spanish bond yields steadied after tumbling to their lowest levels in more than a year at 1.23%.

Italian 10-year bond yields were down 2 basis points at 1.30%, but up from the near three-month lows hit earlier in the day.

"Uncertainties are still there and it will make sense to have profit taking at some point," said Cyril Regnat, fixed income strategist at Natixis.

Regnat said he expected bond markets to be volatile in the weeks ahead as investors digest the impact of Brexit.

DZ Bank strategist Daniel Lenz said Brexit remained a risk for peripheral bond markets given downward revisions to economic growth in the euro zone.

"This will have an effect on the EU, including peripheral countries, and weighs very much on the negative side."

Last week's referendum has wiped out a record $3 trillion off the value of global shares and sent sterling sliding to its lowest level in 31 years before recovering slightly. (Reuters)

Source: www.businessworld.ie

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