Sky-high expectations the ECB will sanction a large stimulus next month to help Germany and other parts of the eurozone to avoid recession sent the market costs of Irish government borrowing to a new low, as Irish bank shares were hit again.
Comments by Oli Rehn, the governor of the Finnish central bank, in an interview with Dow Jones helped push Italy’s 10-year government bond yield to a near three-year low, and Germany’s 10-year bond yield sank to a fresh record low, while the Irish 10-year bond fell to minus 0.15% — theoretically implying that investors buying Irish Government debt would have to pay the Government interest for lending out their money, and not the other way around.
It comes against a background of the highly jittery bond, stock markets, and oil prices which earlier this week plunged amid fears that US President Donald Trump’s trade war with China risks plunging the world into recession, or at least slowing US economic growth to a crawl. Investors tend to abandon stock markets and buy government bonds at times of high uncertainty for the global economy.
Analysts said Mr Rehn’s comments had fuelled expectations for aggressive ECB easing soon, adding momentum to a huge drop in government bond yields across the world.
Mr Rehn, formerly a Finnish politician, is well known here as the key EU commissioner who was the go-between with the late Finance Minister Brian Lenihan as the country hurtled toward a bailout in late 2010.
“The Rehn comments are definitely the catalyst behind the latest bond yield falls,” said Peter Chatwell, head of rates strategy at Mizuho.
“He is saying there is a need for a significant package in September from the ECB,” Mr Chatwell said. The ECB is widely expected to cut interest rates by at least 10 basis points when it meets next month and possibly flag a fresh round of asset purchases to boost economic growth and below-target inflation.
The slide in eurozone bond yields comes in a week when investor fears about world recession risks have risen.
Risks from Brexit to Italian political uncertainty and turmoil in Hong Kong have added to the pessimism. Expectations of a dramatic ECB move in September helped weaken the euro, which traded sharply lower against sterling, to 91.61 pence.
And Irish bank shares were hit again — because rate cuts and stimulus by the central bank next month will make it even tougher for all eurozone banks to generate profits growth in the future.
Already under pressure from the effects that a crash-out Brexit could do to the Irish and British economies, Bank of Ireland fell 1% to bring its losses to 54% in the past year; AIB shares were little changed after plunging earlier in the week but have nonetheless lost 50% of their value in the past year; and Permanent TSB fell by a further 5%, posting a 54% drop in the year.
European and Asian stock markets fell back further, but the S&P 500 index of top listed companies in the US steadied even as fears of the trade war hung over markets, with discordant headlines sending risk assets on a wild ride throughout the American morning. Stocks sold off after China said it would retaliate against fresh tariffs before bouncing back.
Additional reporting Reuters, Bloomberg