Portuguese Notes Climb for 12th Day on S&P as Spain’s Bonds Rise

Portugal’s government bonds rose, with the yield on the notes due in February 2016 falling for a 12th day, as Standard & Poor’s said it no longer sees an imminent risk of a downgrade for the nation.

Bonds from the euro area’s most indebted countries extended this month’s rally as their economies recover from the region’s sovereign debt crisis. Ireland’s bonds rose, with Moody’s Investors Service being scheduled to review its sovereign-debt rating today. Germany’s 10-year bund yield reached the lowest since Dec. 4 even as the rate at which European banks say they see each other lending in euros for three months climbed to the highest since August 2012.

“My guess and increasingly the guess of the rest of the market is that Portugal will pull out of this crisis,” said Luca Jellinek, head of European rates strategy at Credit Agricole Corporate & Investment Bank in London. The extra yield investors demand to hold 10-year Portuguese securities instead of benchmark German bunds will drop to 250 basis points by year-end from the currency 349 basis points, he said.

The yield on Portugal’s 6.4 percent security due in February 2016 fell 11 basis points, or 0.11 percentage point, to 2.39 percent at 4:32 p.m. London time. The price climbed 0.215, or 2.15 euros per 1,000-euro ($1,356) face amount, to 107.98. The 12-day gain is the longest streak since July.

Periphery Rally

Portuguese securities due in February 2024 climbed for a sixth day after S&P lifted the negative “creditwatch” that was applied in September to indicate a substantial likelihood of a downgrade within 90 days. The rate dropped four basis points to 5.26 percent, down 27 basis points this week. S&P retained a negative outlook on Portugal’s BB credit rating.

Ireland raised 3.75 billion euros selling 10-year bonds via banks last week, returning to financial markets after completing a three-year bailout program. Spain sold three-year notes at a record-low yield yesterday, while Portugal, which is planning to resume auctions of bonds in the first half of this year, sold bills this week at the lowest yield since 2009.

Spain’s 10-year yield dropped two basis points today to 3.71 percent, having declined 11 basis points this week. The rate on similar-maturity Italian bonds fell two basis points to 3.82 percent.

The yield on Irish 10-year bonds declined three basis points to 3.44 percent. Moody’s rates Ireland’s debt at Ba1, one level below investment grade. The nation’s outlook was revised to stable from negative on Sept. 20.

‘Weak’ Growth

Dutch 10-year yields fell four basis points to 2.07 percent as Fitch Ratings maintained the Netherlands’s debt at AAA, citing a strong economy and very low financing risks. It retained a negative outlook due to the nation’s “weak” growth expectations.

Bond markets often disregard rating and outlook changes. France’s 10-year yield, which was at 3.08 percent when S&P removed its top rating in January 2012, dropped to a record 1.659 percent in May 2013.

The euro interbank offered rate, or Euribor, for three-month loans rose to 0.302 percent today, according to data from the European Banking Federation. The rate increased as the European Central Bank’s excess liquidity measure dropped to 131.2 billion euros, the least since December 2011, according to data compiled by Bloomberg.

LTRO Repayments

Banks plan to repay 990.5 million euros of three-year loans to the ECB next week, the lowest amount since October, according to a statement published today. ECB Executive Board member Benoit Coeure said in an interview with Bloomberg on Jan. 15 that banks may not need another round of the longer-term refinancing operations.

“Excess liquidity continued to drop over the past few weeks and we have seen further volatility in money market rates,” Annalisa Piazza, a senior fixed-income strategist at Newedge Group in London, wrote in an e-mailed note. “In our view, further LTROs cannot be ruled out in the coming months as further spikes in money market rates would offset the benefit of past policy accommodation.”

The ECB will cut its main refinancing rate to a record 0.1 percent in March to curb an increase in the euro-area’s money-market rates, Royal Bank of Canada strategists Peter Schaffrik and James Ashley wrote in a client note today. Policy makers lowered the key rate to 0.25 percent in November.

Germany’s 10-year yield fell three basis points to 1.75 percent, the lowest since Dec. 4. The rate has dropped eight basis points this week.

Volatility on Austrian bonds was the highest in euro-area markets today, followed by those of France and Finland, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.

Portuguese bonds earned 5 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s rose 2.5 percent and Italy’s gained 1.6 percent.

To contact the reporters on this story: Eshe Nelson in London at enelson32@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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