The rapid recent decline in bond yields could save the Belgian Treasury tens of millions of euros in debt servicing costs over the coming year, the head of Belgium's Debt Agency has announced.
On the morning of 2 January, yields on ten-year Belgian government bonds stood at 2.673%, up slightly from the end of December but well below October's peak of 3.639%.
Similar declines have been observed across the rest of the eurozone. German 10-year bond rates, widely considered the currency union's benchmark, have fallen to 2.023%, down from 2.974% in early October.
"We have not yet estimated the impact of the recent decline in long-term interest rates on the 2024 budget," Belgian Debt Agency Director Jean Deboutte told De Tijd. "But the impact will be several tens of millions, at least €20 million, €30 million, or €40 million."
Belgian Debt Agency Director Jean Deboutte. Credit: Belga / Hatim Kaghat
De Tijd itself estimates that the savings could be even greater, in the region of €200 million – approximately 0.04% of Belgium's annual GDP. Such savings would provide welcome financial relief to the Belgian Government, which is currently running one of the highest budget deficits in the eurozone.
According to the European Commission's latest forecast, Belgium will run a total deficit of -4.9% of annual GDP in 2024 – well above the EU's limit of 3%, which was suspended during the Covid-19 pandemic and subsequent energy crisis but is set to re-enter into force this year.
Excessive optimism?
Analysts attribute bond yields' decline to expectations among investors that the European Central Bank (ECB) will cut interest rates sooner than previously anticipated over the coming year.
The ECB has hiked rates on ten occasions over the past year-and-a-half in its efforts to curb soaring prices, bringing its benchmark deposit facility rate from -0.5% to a record high of 4.0%.
The controversially tight monetary policy has seen eurozone inflation drop to 2.4% in November: only fractionally above the ECB's 2% target rate and well below October 2022's peak of 10.6%. Belgium's inflation rate is currently negative.
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Pierre Wunsch, who is expected to resume his duties as Governor of the National Bank of Belgium within the next few days, warned that bond yields' rapid downswing could be a sign of excessive market optimism. "Financial markets tend to exaggerate. Investors are very enthusiastic about their assumption that the ECB will cut the policy rate by 1.5 percentage points next year."
Analysts also emphasised that the decline in bond yields has had a beneficial impact on Belgian mortgage rates, with the average interest rate for a 20-year fixed-rate loan currently at 3.29%, down from 3.73% in early November.
However, no major impact is currently anticipated on the savings rates offered by Belgium's commercial banks. "I do not expect a rapid reduction in savings rates," said Hans Degryse, a Professor of Finance at KU Leuven, adding: "The ECB may keep interest rates higher for longer than markets now expect."
