Portugal's 10-Year Bond Sale May Get `Lucky' as EU Bailout Reduces Yields
Portugal’s sale of 10-year bonds may benefit from an almost $1 trillion European Union bailout that sent yields on the nation’s debt tumbling.
The Lisbon-based Treasury will auction 300 million euros ($382 million) to 1 billion euros of 4.8 percent bonds due in 2020 today. The yield offered may be about 150 basis points lower than last week, said David Keeble, head of fixed-income strategy at Credit Agricole Corporate and Investment Bank in London. Ten-year yields jumped to 6.33 percent on May 7, the highest since the euro’s 1999 debut, as Greece’s debt woes spread to other nations in the region.
“It’s a good environment to be selling peripheral debt,” said Keeble, who didn’t give a specific yield forecast for the sale. “They are lucky. I would imagine they’re going to get away at a very good level, without having to give too much concession to the current market yields.”
Yields on the bonds of Portugal, Greece, Spain, Ireland and Italy retreated this week after the aid plan, crafted with the International Monetary Fund, eased concern the region’s debt crisis would splinter the 16-nation union. The yield on the 10- year Portuguese security rose 3 basis points to 4.67 percent at 9:52 a.m. in Lisbon, after sliding 181 basis points on May 10.
The yield on Greece’s 10-year bond surged to more than 14 percent on May 7 as traders bet a previous 110 billion-euro EU- IMF rescue would fail to quell the crisis. Investors demanded an extra 354 basis points, or 3.54 percentage points, to hold Portugal’s 10-year securities instead of benchmark German bunds that day, the most since the introduction of the euro. The spread was 159 basis points yesterday.
Portugal’s rating was lowered two steps to A-, four rungs above junk, on April 27 by Standard & Poor’s. Moody’s Investors Service said on May 10 that it may reduce the country’s ranking, which is on review for a downgrade, one step to Aa3 and can’t rule out an “adjustment” to A1, six steps above junk.
The country may have a better result than Spain, which sold five-year bonds on May 6 at the highest yields since 2008 after its debt ranking was cut, Credit Agricole CIB’s Keeble said.
The IGCP, Portugal’s debt management agency, said today that it bought back 225 million euros of a 5.85 percent bond maturing this month.
The government sold 2021 bonds in March and debt due in 2020 in April at average yields of 4.17 percent and 4.34 percent, respectively. The so-called bid-to-cover ratio, a gauge of investor demand, was 1.6 at both sales.
Today’s auction is part of about 25 billion euros that the government is seeking to raise this year, including as much as 22 billion euros in bonds, according to the Portuguese debt agency’s website.
“There is always going to be local demand for this bond, otherwise the debt agency would not have gone ahead with it,” said Mohit Kumar, a fixed-income strategist at Deutsche Bank AG in London. “The timing of the sale is great. The rescue package is impressive and there will be a lot of support for this auction. It would have been a different story last week.”
The debt agency estimated in April that between 15 percent and 17 percent of Portugal’s outstanding public debt is held by domestic investors.
Countries across the euro region are struggling to cut budget deficits that ballooned as governments funded bailouts and economic stimulus measures to ease the worst global recession since World War II.
Portugal lowered its 2010 budget-deficit target to 7.3 percent of gross domestic product, from a previous goal of 8.3 percent, Prime Minister Jose Socrates said on May 7. The gap was 9.4 percent last year, more than three times the EU limit.
Economic growth, which hasn’t reached 2 percent per year since 2001, may hinder his efforts. The government expects 0.7 percent GDP growth this year amid the lowest productivity among the 16 countries using the euro, according to EU statistics.
The economy grew 1 percent in the first quarter from the previous three months, the National Statistics Institute said today in a preliminary report.
Portuguese bonds have lost 1.6 percent this year through May 10, worse than all other euro members apart from Greece, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek debt has lost 28 percent, the indexes show.