Portugal Shows QE Limit as Neighbors' Bonds Leave It Behind

  • German 10-year yield far less than Portugal's for 2 years
  • Portugal's premium also rises relative to neighboring Spain's

Portugal just can’t shake off its bears. The nation’s shorter-term notes are underperforming their counterparts across the euro area even as a recovery in stocks and oil prices boosted demand for higher-yielding assets.

The extra yield, or spread, that investors get for holding Portuguese two-year debt instead of similar-maturity notes of Germany climbed for a second day. The country’s two-year yields are more than 1 percentage point higher than those in neighboring Spain, whose leaders have been unable to form a government after inconclusive elections in December.

Portuguese bonds are weighed down by political challenges to austerity policies that were set with the approval of its creditors. That’s diluting the impact of European Central Bank asset purchases that otherwise support bond prices and have pushed down shorter-dated yields across the region, except for Greece’s, to less than or near zero.

Germany sold 10-year bonds to yield 0.26 percent on Wednesday, the least since April, while market prices signal Portugal would be charged about 1.25 percent to borrow for just two years. ECB President Mario Draghi earlier in the week said the institution will take measures if financial turmoil threatens its policy goals, without being more specific about the options for quantitative easing.

“Despite the recovery we’ve seen, the selloff trend is not over yet,” said Daniel Lenz, lead market strategist at DZ Bank AG in Frankfurt. “Portugal definitely stands out. Yields point to this highly extended risk that investors have started pricing in.”

Yield Premium

Portugal’s two-year note yield increased five basis points, or 0.05 percentage point, to 1.25 percent as of 4:45 p.m. London time. The 4.45 percent security due July 2018 fell 0.13, or 1.30 euros per 1,000-euro face amount, to 107.27. That left the yield premium over the German notes at 176 basis points, compared with about 45 basis points at the start of 2016.

The yield on Spain’s two-year note fell three basis points to 0.03 percent, and it little changed at minus 0.51 percent for Germany’s.

Portugal’s 10-year yield reached 4.53 percent on Feb. 11, the highest since March 2014. On Wednesday it fell six basis points to 3.49 percent.

Germany’s 10-year bund yield was little changed at 0.27 percent, having been as low as 0.13 percent on Feb. 11, the least since April.

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