December 28, 2015, The Irish Times
More than €27 billion of Irish Government bonds are among some €1.5 billion in euro zone government debt where the yield is less than zero, indicating that markets expect European Central Bank policy to remain strongly supportive of bonds in 2016.
Irish Government bonds maturing in 2016 to 2018 head towards the end of this year with negative yields. A further €16 billion of 2019 debt is trading just fractionally above zero per cent. Ireland’s total gross national debt is just over €201 billion, according to the most recent figures, though this reduces to €182 billion when the State’s cash balances are deducted.
The negative yield on short-term Government debt, effectively meaning investors are paying a small fee to lend money to many euro zone governments , reflects the massive buying of bonds by the ECB and the penalties in place for investors depositing short-term money with central banks.
The ECB has undertaken a massive €1.5 trillion programme of support for government bonds as part of a quantitative easing programme designed to pump cash into the economy.
Begun in March this year, the purchases continue to push an increasing number of securities off the table — meaning their yields are so low they’re ineligible for buying. The total issued value of bonds that yield less than the ECB’s minus 0.3 per cent deposit rate, and are thus deemed ineligible for acquisition by the ECB, is about $616 billion of the $6.35 trillion Bloomberg Euro zone Sovereign Bond Index.
A slump in oil prices is supporting economists’ view that the ECB is unlikely to veer from its accommodative policy stance as it struggles to achieve its inflation goal of just under 2 percent, fulfilling a principal aim of the asset-purchase program.
So many sub-zero-yielding securities “indicate that there is a belief that there is no real inflationary pressures evident yet, and the ECB will remain ready to do more if required,” said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald.
German two-year note yields were at minus 0.337 per cent as the markets closed for Christmas.
With oil languishing near an 11-year low and the region’s inflation a long way below the ECB’s goal, Mr Callan said “crude oil is probably the leading indicator as regards to where ECB policy and where bond yields go in the start of 2016. That is what most of the markets are looking at the moment.”