Portuguese government bonds look hot again.
With Greece pushed into a plan to stay in the euro, investor concern has melted that Portugal may be next in line to walk the currency gangplank. That view gathered force as the Iberian nation increasingly is seen as having a relatively low risk of political upheaval. At the same time, its bonds will be supported by European Central Bank purchases.
“Portugal has the most to benefit from the Greek bailout compared to other peripheral nations such as Spain because it is the one that suffered the most from uncertainty on Greece,” says Chiara Cremonesi, a fixed-income strategist at UniCredit Bank AG in London. “So the room for rallying is comparatively larger than for Italy and Spain.”
Portuguese securities led the rally among Southern European nations in bond markets over the past week as Greece and its creditors battled in the most intense talks of their six-month long negotiations. Greece’s parliament is set to vote on the rescue plan’s pension curbs and tax increases Wednesday.
Debt sold by the Portuguese state, after losing more than peers in the past three months, on Monday pulled ahead of the euro-area average in the performance race. It lost 5.1 percent in the period, compared with a 5.4 percent average loss, Bloomberg World Bond Indexes data show.
The country’s 10-year securities rose for a sixth straight day on Tuesday. Even with the surge, they still yield about 2.75 percent. That’s the highest in the currency bloc after Greece. The bonds can’t be bought by many money managers because they’re still classified as junk by the three main rating companies.
Portugal was last in favor in the three months leading up to the start of the ECB’s quantitative-easing program in March. It led the euro-area debt rally in that period, with 10-year yields decreasing by more than 100 basis points, or one percentage point.
The government faces no concrete threat from anti-austerity parties in elections during coming months. Spain can’t claim that: Its May 24 elections brought to power upstart coalitions backed by the anti-austerity Podemos party in the city halls of Madrid and Barcelona, Spain’s most populous cities.
While both nations benefit from debt purchases by the ECB’s QE program, which helps cap interest rates, the yield difference augurs an investment opportunity.
Investors demand about 68 basis points more yield for 10-year Portuguese bonds than their Spanish counterparts, compared with a one-year low of 38 basis points in April.
And the ECB has yet to employ another of its tools to safeguard its policies and support euro-area debt, so-called Outright Monetary Transactions.
“The ECB is giving steady support through QE and stands ready to give more support in OMT,” said Ciaran O’Hagan, head of European rates strategy at Societe Generale SA in Paris, referring to the two asset-purchase program introduced by the ECB since 2012. “That makes shorts think twice, if not three times” in betting against Portuguese bonds.
A short position is a bet that an asset will lose value.
The ECB’s targeted buying will total the equivalent of about 81 percent of Portugal’s remaining debt sales this year, compared with 56 percent of Spain’s and 41 percent of Italy’s, according to Cremonesi at UniCredit.
Portugal’s mainstream parties are seen holding on to support despite four years of austerity, soaring unemployment and sluggish growth. That picture has been less certain in Spain, even though it has a much brighter outlook. The government last week confirmed that it will bring forward income tax cuts slated for next year and said an estimated 3.3 percent economic growth in 2015 will help create 600,000 jobs.
In an opinion poll released last week by the newspaper Expresso, Portugal’s Socialists, the biggest opposition party, led the ruling coalition of the Social Democrats of Prime Minister Pedro Passos Coelho and the smaller conservative CDS party by a margin of 2.1 percentage points. Backing for the Socialists dropped 0.2 percentage point from a June poll.
Portugal’s national elections are set to be held between Sept. 14 and Oct. 14. The Socialists are led by Antonio Costa, the former mayor of Lisbon.
Orlando Green, a fixed-income analyst at Credit Agricole SA’s corporate and investment-banking unit in London, sees other differences between the Socialists in Portugal and anti-austerity parties like Podemos in Spain or Syriza in Greece. “They know how to move on around the political arena that is the European Union.”
Portugal has also improved its fiscal and macroeconomic front since 2011. Unemployment is on a declining path and its public debt position looks much more favorable than Spain’s, according to a report by UniCredit published last week.