Portugal Bond Sale Attracts Demand for Three Times Deal Size

Portugal’s first sale of 10-year bonds since its bailout in 2011 attracted demand for more than three times the amount the government was seeking to raise.

Investors submitted bids for 10.2 billion euros ($13.3 billion) of the securities due in February 2024 being sold via banks, compared with the 3 billion-euro target, according to a person familiar with the deal who asked not to identified as they are not permitted to speak about it. The sale takes place as yields on the country’s existing 10-year securities are at the lowest since 2010 and a decline in interest rates worldwide is leading investors to seek higher returns.

“The demand Portugal got from investors was strong, which reinforces the positive sentiment,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “In a low-yield environment, investment is attracted to securities that offer yield. Portugal is trying to issue bonds all across the curve to show they can tackle the market and as a precondition to exit the bailout.”

The sale was arranged by Caixa-Banco de Investimento, Citigroup Inc., Credit Agricole SA, Goldman Sachs Group Inc., HSBC Holdings Plc and Societe Generale SA, a person who asked not to be identified because they’re not authorized to speak about the transaction said yesterday.

Deal Pricing

The new securities yielded 400 basis points, or four percentage points, more than the mid-swap rate, according to an official at the finance ministry. The coupon is 5.65 percent.

Portugal stopped selling bonds until this year after requesting a 78 billion-euro bailout from the European Union and International Monetary Fund in April 2011 following a surge in debt levels and borrowing costs.

“We are quite happy,” Portugal’s debt chief Joao Moreira Rato said in a telephone interview today. “We have more than 360 investors and the book was three-times oversubscribed. It was a big worry of ours to price well and to have the right size so I hope it performs in the next few weeks.”

The nation’s 10-year bond yield was little changed at 5.52 percent at the 5 p.m. close of trading in London, after falling to 5.44 percent, the lowest since August 2010. The two-year yield declined 14 basis points to 2.42 percent, and the five-year rate fell eight basis points to 4.14 percent.

Overseas Investors

“Portugal wants to demonstrate that it is able to stand on its own two feet, it is clearly very desperate to unshackle itself from the aid package,” said Harvinder Sian, a senior fixed-income strategist at Royal Bank of Scotland Group Plc in London. “The market conditions recently have been quite favorable toward the periphery and Portugal has benefited from that.”

About 86 percent of the ten-year securities were sold to overseas investors, including 27 percent to the U.K. and 16 percent to the U.S., a finance ministry official said. About 12 percent were taken up by insurance companies and pension funds, and 5 percent by central banks.

“It’s particularly worth highlighting the return of traditional investors to Portuguese government debt, such as central banks, pension funds and insurance companies,” Maria Luis Albuquerque, the secretary of state for treasury and finance, told reporters in Lisbon today.

Last Auction

Portugal’s 10-year yield fell below 6 percent in January for the first time since 2010, encouraging the nation to follow Ireland in selling bonds via banks. The nation last auctioned 10-year bonds in January 2011 at a yield of 6.716 percent.

The nation sold 2.5 billion euros of five-year notes at a yield of 4.891 percent on Jan. 23, the first offering of that maturity since February 2011.

“We’ve already been able to totally finance our needs for this year and are starting the pre-financing for 2014 to ensure that we are in condition to successfully exit the adjustment program,” Finance Minister Vitor Gaspar told reporters today in Brussels. “The 10-year maturity is very important because it completes the yield curve and so completes our process of returning to bond markets.”

Bailout Program

European Central Bank President Mario Draghi said in September that debt purchases may be considered for euro-area countries currently under bailout programs, such as Portugal, Greece and Ireland, when they regain bond-market access. Outright Monetary Transactions “would not apply to countries that are under a full adjustment program until full market access will be obtained,” Draghi said Oct. 4.

“Regarding OMT eligibility, I think that Portugal not only needs to issue in more points of the curve but also more than one time per point of the curve,” said Ricardo Santos, an economist at BNP Paribas SA in London.

Portuguese Prime Minister Pedro Passos Coelho on May 3 announced measures intended to generate savings of about 4.8 billion euros through 2015 that include reducing the number of state workers as he tries to meet deficit targets.

The spending cuts will allow Portugal to secure an extension of rescue loans that was agreed upon in principle on April 12 by EU finance ministers meeting in Dublin.

Junk Rating

Ireland and Portugal both received rescue loans from two different programs: the EU-wide European Financial Stabilization Mechanism and the euro-area’s temporary firewall, the European Financial Stability Facility. The seven-year extension to maturities of aid loans implies an increase in the average maturity of Portugal’s total debt to about 8.5 years from about seven years, the nation’s debt agency said on April 19.

Portugal’s bonds are ranked junk, or high-yield, high risk, by Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. Moody’s is the only one of the three companies to assess Ireland as below investment grade.

“I think the rating will have to move in the direction of investment grade at a higher speed than it has been moving,” Rato said. “We always stress that they are lagging the market.”

The extra yield investors demand to hold Portugal’s 10-year bonds instead of German bunds shrank to as narrow as 4.18 percentage points today from a euro-era record of 16 percentage points in January 2012.

Portuguese bonds returned 5.8 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spain’s rose 8.6 percent and Germany’s gained 0.8 percent.

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