Irish borrowing costs on the bond markets fell to fresh lows yesterday as the European Central Bank (ECB) began to implement quantitative easing.
With its first purchase of government bonds under its enhanced stimulus plan, the ECB showed its willing to be patient in its efforts to reignite the euro area’s economy.
The ECB and national central banks started buying sovereign debt yesterday under the 19-month plan to inject €1.1 trillion into the economy.
While purchases included bonds from at least five countries, the size of individual trades, at between €15m and €50m, was small relative to the programme’s goals, sources said.
“The amount bought may be small to start with, but this will be like a pressure cooker,” said Ciaran O’Hagan, head of European rates strategy at Societe Generale in Paris.
“They have just switched on the heat and we will need some time for the pressure to mount.”
Euro-area bonds extended a 14-month rally fuelled by speculation that buying €60bn of debt a month will create a scarcity of government bonds among buyers of the securities.
Yields already fell to record lows across the region as the Frankfurt-based bank follows in the quantitative-easing footsteps of the Federal Reserve, Bank of England and Bank of Japan.
The yield on Ireland’s 10-year bonds fell 0.029 percentage points yesterday afternoon to 0.82pc. Germany’s 10-year bunds fell the most in six weeks, dropping eight basis points to 0.31pc.
Gains in Italian bonds were smaller, with the yield on similar-maturity debt slipping two basis points to 1.3pc.
That widened the yield gap between the two to 99 basis points, after it narrowed to 90 basis points on Friday, the narrowest spread since 2010.
“We will see more spread compression ahead,” SocGen’s O’Hagan said.
National central banks purchased Belgian, French, German, Italian and Spanish debt, according to sources.
The ECB said in a Twitter post that it had started purchases along with national central banks, while a spokesman for the Bundesbank said it was active in the market. The Bank of Finland also confirmed on Twitter that it was buying.
The buying of bonds will be made roughly in proportion to the capital that each member central bank has contributed to the ECB, though that guideline doesn’t have to be strictly followed every month.
There’s also flexibility on what maturity of bonds will be bought by the central banks to reach their target, and acquisitions of asset-backed securities and agency debt are also included in the plan.
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