10-year bond yield rises to 6.78%

2024-01-23 07:25:41, Ekonomi CNA

The 10-year bond auction that took place on Monday confirmed the rising signals of long-term government bond yields, following a trend that has emerged since the second half of last year.

According to the data of the Bank of Albania, the accepted uniform coupon and yield of 10-year bonds reached 6.78%. The bond yield is increasing compared to the level of 6.44% in the reopening of the last auction of these instruments, which was held in October last year.

The increase in yield, however, was partially influenced by the decision of the Ministry of Finance to increase the planned amount of the issue. Out of the 4 billion ALL that was the amount announced for financing, total requests in the amount of 4.77 billion ALL were presented at the auction.

The Ministry of Finance decided to increase the amount of received requests to ALL 4.15 billion. In bond auctions, the yield is determined to be uniform with the yield of the highest bidder accepted. In this way, the acceptance of more requests also affects the increase in the yield of the bond.

The yields of the long-term debt instruments of the Albanian government have given signals of a new cycle of growth, especially after the fall of last year. This increase is not comparable to that which affected the market in the second half of 2022 and which was driven by the rapid increase in interest rates by the Bank of Albania.

However, the rise in long-term debt yields in itself implies expectations for a further upward move in interest rates by the central bank.

Last year, the Bank of Albania significantly restrained the increase in interest rates and applied a total of only two increases, in total by 0.5 percentage points.

10-year bond yield rises to 6.78%

The base rate of 3.25% is among the lowest in Europe. The softening of the Bank of Albania was argued with the amortizing effect on inflation that the strengthening of the Lek gave in the exchange rate, but also with the restrictive features of the fiscal policy.

However, in November of last year, the Bank of Albania warned that the reduction of inflation in the target, which is expected to happen in the second half of this year, may require a further increase in interest rates. Inflation stopped the decline at the level of 3.8% in October last year, while in November and December it increased slightly up to 4%.

Risks surrounding price increases remain high, due to geopolitical tensions in Eastern Europe and the Middle East. Meanwhile, in parallel, the Albanian economy continues to face inflationary pressures from the labor market, which last year was characterized by low levels of unemployment and double-digit wage growth. Under these conditions, it seems difficult for the upward cycle of interest rates to end at the current level of 3.25%.

The markets also seem to have an expectation for further rate increases, which largely explains the increase in bond yields.

The debt instruments of the Albanian government actually offer satisfactory returns in relation to the risk and many investors, including individual ones, were sensitive to their high yields, especially with the end of 2022 and the beginning of 2023./ Monitor.al