Interest on 10-year bonds above 1%

 In Bonds and Gilts, News

Interest rates on Portuguese 10-year sovereign bonds have increased beyond 1% for the first time since April 2020.

It was the seventh consecutive percentage point increase. The yield on 10-year treasury bonds rose to 1.003%. The last time yields crossed the 1% barrier was on 27 April 2020, almost two years ago during the uncertainty of the pandemic.
Five year bonds are also trading in positive interest territory and are now offering 0.33%, the highest amount since May 2020.
But what is putting pressure on interest rates? The European Central Bank is preparing to increase interest rates to counter inflation in the Euro Zone. The European Central Bank has a 2% medium-term target on inflation. At the last meeting, the ECB left interest rates as they were when it began to scale down its EU Member-State bond buying shopping spree.
At a press conference, Christina Lagarde admitted that there was “unanimous concern” on the impact of inflation, particularly for struggling families, and said more news about the direction of EBC monetary policy would have to wait until March.
Goldman Sacs and Deutsche bank analysts have forecast an increase in interest rates, the first in a decade, for September.
In an interview with TSF radio, the dean of business school Nova SBE, Daniel Traça said debt purchasing (by the ECB) will be reduced and you can already see the interest rates on Portuguese 10-year bonds begin to reflect this.
“There will be interest rate increases this year. This will not immediately affect Portugal’s deficit because the IGCP (Portugal’s treasury and public debt institute) has managed its public debt portfolio well, so there will not be a huge amount of debt being renegotiated over the next two years, but over time there will be implications”, he said.
By way of example, if Portugal were to have a rate of public debt at 100% of GDP – in fact it is much higher — each 1% of interest would add 1% onto the deficit.
“Public accounts must be balanced and public debt control is essential so that when there is an increase in interest rates it will impact the public deficit as little as possible, because if not, we will lose any room for manoeuvre in terms of social supports. And from 2023/24, not only will bond purchasing (by the ECB) reduce, but interest rates will rise, which will reflect in people’s accounts, bank account interest, and mortgages”, warned the dean of Nova SBE.