Portuguese Bonds Rise as Coelho Signals Return to Bond Market

Portuguese 10-year bonds rose for a third week after Prime Minister Pedro Passos Coelho signaled the nation plans to return to the debt market as it does not want a second rescue program.

German bunds advanced as European Central Bank Executive Board member Benoit Coeure said in Paris yesterday he doesn’t expect repayments on ECB loans by banks to affect a key money market rate. Spanish securities slid after a report showed euro-area industrial production fell in November more than economists forecast.

“The market is taking the news on Portugal planning to return to the market positively,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “It’s not that Portugal has solved its problems overnight. It’s just that there is a huge appetite for high-yielding assets and there’s ample liquidity in the market, which the country may be able to take advantage of.”

The yield on 10-year Portuguese bonds dropped nine basis points, or 0.09 percentage point, from last week to 6.12 percent at 5 p.m. London time. The 4.95 percent security maturing in October 2023 rose 0.625, or 6.25 euros per 1,000-euro ($1,331) face amount, to 90.925.

Also in Paris yesterday, Coelho said his government will soon announce the measures that are “necessary to materialize” the return to the market. Portugal’s net borrowing needs will be about 11.5 billion euros in 2013, the debt management agency said on Jan. 11. The country hasn’t auctioned bonds since requesting a bailout in April 2011.

Repaying Loans

Banks are able to begin repaying loans taken from the ECB’s Longer-Term Refinancing Operation from the end of this month. The Frankfurt-based ECB lent financial institutions about 1 trillion euros for as much as three years via two LTROs in December 2011 and February last year. Banks in so-called core countries including Germany are likely to be the first to repay the ECB loans, according to Soniya Sadeesh, a strategist at Deutsche Bank AG in London, wrote in a Jan. 17 note.

Spanish and Italian bonds fell for the first week in three. Spain’s 10-year rates rose 19 basis points to 5.08 percent and those on similar-maturity Italian securities climbed four basis points to 4.17 percent.

Output in the euro area dropped 0.3 percent from October, when it declined a revised 1 percent, the European Union’s statistics office in Luxembourg said Jan. 14. Economists had forecast an increase of 0.2 percent, according to the median of 37 estimates in a Bloomberg News survey.

Services, Manufacturing

Euribor futures dropped, indicating traders expect interbank borrowing rates to increase. The implied yield on the December 2013 contract climbed seven basis points this week to 0.435 percent, and rose to 0.54 percent yesterday, the highest since July 10.

An index of euro-area services and manufacturing output contracted for a 12th month in January, according to the median estimate of economists surveyed before the report by Markit Economics on Jan. 24.

German bonds lost 1.5 percent this month through Jan. 17, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spain’s gained 1.4 percent and Italy’s advanced 1.9 percent.

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