Portugal Borrowing Costs Fall at Auction; Bonds Rise Amid ECB Purchases
Portugal’s borrowing costs fell and demand rose at a sale of 10-year bonds after European Central Bank debt purchases this week helped push down yields, sending the securities higher in the secondary market.
The nation sold 599 million euros ($778 million) of bonds due in 2020 at a yield of 6.716 percent, the Portuguese debt management agency said today. That compares with 6.806 percent at the previous auction on Nov. 10.
The auction prompted a surge in European stocks and a decline by the safest assets, such as the Swiss franc and German bunds, which had been bid up last week on concern demand for Portuguese securities and tomorrow’s Spanish and Italian auctions would wither. Portugal is raising taxes and lowering wages to show investors it can narrow its budget gap after the Greek debt crisis led to a surge in borrowing costs for the most-indebted euro nations. Prime Minister Jose Socrates said yesterday the effort had cut the deficit below the 7.3 percent of gross domestic product forecast for last year.
“The sale was supported by a number of factors that happened earlier in the week,” said Mohit Kumar, a fixed-income strategist at Deutsche Bank AG in London. “The European Central Bank reportedly bought aggressively. Japan and China expressed their support. But Portugal’s funding challenges are still there.”
The government also placed 650 million euros of bonds due in 2014 at a yield of 5.396 percent, up from the 4.041 percent on Oct. 27.
Gains on 10-year Portuguese bonds pushed the yield down 3 basis points to 6.98 percent as of 5 p.m. in London.
Japanese officials have pledged to extend their purchases of bonds issued by the European Union’s financial-aid funds, while People’s Bank of China Deputy Governor Yi Gang said today that his nation is a “long-term” investor in Europe.
The ECB bought Portuguese, Irish and Greek debt, traders said yesterday and the day before. A spokesman for the central bank in Frankfurt declined to comment yesterday.
“The ECB has the power to push back on these yields by becoming a big buyer,” Jan Randolph, head of sovereign risk at IHS Global Insight, said today in an interview with Deirdre Bolton on Bloomberg Television’s “InsideTrack.”
Portuguese 10-year bonds rose relative to German bunds, narrowing the yield spread by 26 basis points to 371 basis points today, according to Bloomberg generic prices. Portuguese three-year bonds are yielding 5 percent, less than the average 5.8 percent that Ireland is paying on its emergency package from the EU and International Monetary Fund.
‘No Game Changer’
“The auction result provided some relief, but it’s no game changer,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “Portugal is still paying penalty rates for their borrowing, and there is still pressure on the government. The risk that they might have to seek aid can’t be excluded.”
Portugal needs to sell as much as 20 billion euros in bonds this year to finance its budget and redemptions, and said it plans to market a new bond through banks in the first quarter. The government doesn’t face any maturities until April, with repayments that month and in June of about 9.5 billion euros. The nation’s debt agency estimates this year’s gross financing needs will be 3 billion euros lower than in 2010.
European governments are considering aid for Portugal, debt buybacks, lower interest rates on rescue loans and guarantees against excessive debt as part of a package to quell the financial crisis, according to two people with direct knowledge of the talks. The plan may include a loan to Portugal of about 60 billion euros, the people said.
The auction was the first bond sale this year by a so- called peripheral nation. Spain offers as much as 3 billion euros of five-year debt tomorrow, while Italy auctions as much as 6 billion euros of bonds due 2015 and 2026. Greek and Italian borrowing costs rose and demand fell at sales of almost 9 billion euros of Treasury bills yesterday.
Portugal’s auction was at the upper end of the planned range of 750 million euros to 1.25 billion euros. Investors asked for 3.2 times the amount of 10-year bonds sold, up from 2.1 times at the November sale. They sought 2.6 times the 2014 bonds on offer, less than the 2.8 bid-to-cover ratio in October.
Socrates said yesterday that Portugal doesn’t need a bailout and that government revenue rose more than forecast, while spending increased less than forecast last year, leaving the country well positioned to meet its deficit pledges.
“Portugal is in the process of giving results that are better than what they said they would do and that will reassure investors,” French Finance Minister Christine Lagarde said today in an interview broadcast on France 2 television. “I hope they will stick to their commitments and more, and under these conditions investors will look kindly on Portuguese debt.”
Portugal’s 2011 budget includes the deepest spending cuts in more than three decades. The government is trimming the wage bill by 5 percent for public-sector workers earning more than 1,500 euros a month, freezing hiring and raising value-added sales tax by 2 percentage points to 23 percent to help narrow a deficit that amounted to 9.3 percent of GDP in 2009, the fourth- biggest in the euro region after Ireland, Greece and Spain.
Portugal’s borrowing costs may come under renewed pressure should rating companies make good on threats to cut the nation’s creditworthiness. Moody’s Investors Service said on Dec. 21 Portugal’s rating may be downgraded one or two levels because budget cuts may worsen the country’s “sluggish” economic growth. Fitch Ratings left its outlook negative on Dec. 23, even after cutting the rating one level to A+. Standard & Poor’s said on Nov. 30 it may lower the country’s A- rating.
“We see little scope for Portuguese spreads to narrow substantially from the current levels, which we deem as unsustainable, making it more likely than not that Portugal will eventually be forced to seek external assistance,” Tullia Bucco, an economist at UniCredit Global Research in Milan, wrote in a note to investors yesterday. “We estimate that the total size of the rescue package could be around 60 billion euros, sufficient to cover bond redemptions and the expected budget deficit for the next three years.”
The country set a target for a budget deficit of 4.6 percent of GDP in 2011, and aims to reach the EU limit of 3 percent in 2012. The country’s debt, at 82.8 percent of GDP last year, is forecast to increase to 88.8 percent in 2011, according to the European Commission.
Portugal is counting on exports such as paper and wood products to support economic expansion. The budget forecasts GDP growth of 0.2 percent in 2011, slower than last year’s estimated 1.3 percent pace. Portugal’s economic growth has averaged less than 1 percent a year in the past decade, one of Europe’s weakest growth rates.
The Bank of Portugal yesterday said gross domestic product will shrink 1.3 percent in 2011 as consumer demand drops and the government cuts spending.
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