Uncertainty and ECB rate hike announcement push Cypriot bonds yields upwards

Economic uncertainty amid the Ukraine war and the European Central Bank rate hikes announcement are pushing Cyprus bond yields upwards in the wider context of sovereign bond sell-off in secondary capital markets.

According to the latest data, Cyprus’ ten-year bond yield reached 3.149 per cent on Friday up from 2.996 per cent the day before. The spread of Cyprus’ ten-year bond yield and the German bund amounted to 165 basis points.

Sovereign bond yields of the majority of the Eurozone members have been moving upwards, with economist and KPMG Cyprus Board member Tasos Yiasemides noting that the markets have factored-in ECB’s announcement to terminate the cycle of negative rates.

Germany’s ten-year bond, which is the reference point for other sovereigns, entered in positive territory in March following years of negative yields.

“The ECB’s decision to hike its base rates in July has been factored in by the markets in the last weeks,” Yiasemides told CNA.

On Thursday, the ECB announced it will increase its base rates by 25 basis points, in the first-rate hike in 11 years.

The ECB will also terminate bond purchases under the Asset Purchase Programme (APP) and will follow suit with an additional rate hike in September.

According to Yiasemides, the gradual roll-off of quantitative easing, also known as tapering was deemed necessary by the ECB in a bid to contain inflationary pressures although “its effectiveness is not that obvious as price increases are fuelled by increasing costs in energy, as a result of the technical marked interventions by the conflict in Ukraine, (Western) sanctions and (Russian) countersanctions.”

“Moreover,” he added, “the yield rises reflect the concerns and uncertainty with regard to the course of the global economy and the national economies with Europe facing perhaps the largest negative impact.”

Recalling sovereign debt rose, as fiscal support measures during the Covid-19 pandemic, was a mainly debt-driven event, Yiasemides highlighted the ECB’s expressed readiness to support EU periphery states that are facing the largest challenges due to high sovereign debt.

Asked about the impact of the expected rate hikes, Yiasemides said that ECB decisions will increase borrowing costs, noting however that the negative interest environment has enabled governments to replace short or medium-term debt with longer maturities which render financing needs more manageable.

“Countries with comparative higher dent indices, such as Cyprus, should remain focused on reducing debt via a prudent fiscal policy,” he said, noting however that “this could be challenging for an outward-looking economy which is called on to operate in a very difficult political and financial international environment.”

Furthermore, Yiasemides pointed out that bond-yield increases would inevitably lead to a reshaping of investment portfolios while the euro exchange rate over other strong currencies is also important.