Portugal’s 10-year government bonds dropped for the 11th consecutive day after Moody’s Investors Service lowered the nation’s credit rating for the second time in three weeks amid expectations it will need a bailout.
Irish bonds advanced for a third day, narrowing the yield difference to Portuguese securities. German 10-year government bond yields were within three basis points of the highest in almost 15 months on bets the European Central Bank will raise interest rates this week. A gauge of euro-area services gained more than initially estimated and a separate report today showed retail sales shrank 0.1 percent in February.
“We have seen all these downgrades taking place, which were very aggressive,” said Ioannis Sokos, a fixed-income strategist at BNP Paribas SA in London. Portuguese “yields remain very high and there is no reason to see them lower before a government is formed and new fiscal measures are agreed.”
Portuguese 10-year government yields gained 17 basis points to 8.76 percent as of 4:43 p.m. in London, after reaching a record 8.80 percent. The securities’ 11-day drop is the longest run since the 16 days through Dec. 27. The 3.85 percent security due April 2021 fell 0.88, or 8.80 euros per 1,000-euro ($1,421) face amount, to 68.09. The two-year note yield rose 33 basis points to 9.15 percent.
Moody’s lowered Portugal’s long-term government bond rating by one level to Baa1 from A3, and said it may reduce the ranking further. The move puts the country at the same level as Russia, Mexico and Thailand.
Ireland ‘Steps Ahead’
Portugal, which will hold elections in June after Prime Minister Jose Socrates resigned last month, will probably be able to finance a debt redemption due this month, Sokos said. It may need to seek a “bridge loan” from external sources when more securities come due in June because it won’t be able to request official aid until a government is formed, he said.
Portuguese banks decided at a meeting with the Bank of Portugal yesterday that they won’t buy more government bonds in the next few months, Jornal de Negocios reported, without saying how it obtained the information. The nation plans to sell as much as 1 billion euros of government bills due in October and March tomorrow. The European Commission said it isn’t in discussions with Portugal over a possible bridge loan, denying a report today in Publico newspaper.
The extra yield investors demand to hold 10-year Portuguese government bonds instead of their German counterparts reached a record 544 basis points.
Irish 10-year bond yields fell 13 basis points to 9.68 percent, the lowest since March 22. The yield spread to benchmark German bunds narrowed to 629 basis points. Standard & Poor’s cut the country’s rating to BBB+ from A- on April 1 and left it with a stable outlook.
“Ireland is a couple of steps ahead compared to Portugal,” Sokos said. “The stable outlook assigned by Standard & Poor’s is a very strong signal, and there seems to be a floor, at least,” for Irish government bonds, he said.
Portugal surpassed Ireland as a default risk for the first time in seven months today as investors bet the Iberian nation will also have to request a bailout as the cost of insuring Irish and Portuguese debt using credit-default swaps crossed.
Growth in Europe’s services and manufacturing industries accelerated more than initially estimated in March, led by Germany and France. A composite index based on a survey of purchasing managers in the 17-nation euro region was 57.6 from 58.2 in February, London-based Markit Economics said. That compares to a 57.5 initial estimate.
Germany’s 10-year yield rose two basis points to 3.39 percent, after reaching 3.41 percent on April 1, the highest since Jan. 8, 2010. Yields on two-year notes increased three basis points to 1.84 percent.
ECB President Jean-Claude Trichet said on March 3 that policy makers may raise the main refinancing rate from a record low of 1 percent at their April 7 meeting.
“Fundamentals are taking a back seat and people are waiting for what the ECB will deliver,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “The main thing is whether the central bank will signal this rate hike is a one-off, or whether they will go further.”
Austria sold 880 million euros of debt maturing February 2017 at an average yield of 3.21 percent and 770 million euros of debt dated April 2022 at 3.812 percent in an auction today, the Austrian Federal Financing Agency said.
As well as Portugal’s bill sale, Finland is scheduled to auction bonds maturing in 2025 and 2016 tomorrow, while Germany plans to sell as much as 5 billion euros of two-year notes.