Portugal borrowed €1 billion today in its first bond auction for two months, opting to endure surging interest costs as it tries to avoid following Greece and Ireland in seeking a bailout.
The nation sold 5.45 per cent bonds due September 2013 at an average yield of 5.993 per cent. The debt agency last sold bonds with that maturity on September 8th, raising €661 million and paying a yield of 4.086 per cent on securities that currently offer about 6.37 per cent. Portugal's 10-year bond yield climbed to a euro-era record of 7.7 per cent today.
"The yield is not sustainable," said Norbert Aul, a strategist at Royal Bank of Canada in London. "It will become even more difficult amid the refinancing needs in April and June, so it becomes likely that Portugal will have to ask for financial aid."
Portugal wants to maintain access to the international capital markets, while it raises taxes and implements the deepest spending cuts in more than three decades. Policy makers aim to convince investors they can narrow the budget gap further and avoid a bailout after the Greek debt crisis led to a jump in yields for high-deficit euro nations.
"I would call it more a token, a symbolic move," said Dirk Poelman, a fixed-income fund manager at KBC Asset Management in Brussels, part of a team overseeing €16 billion. "They are putting on a brave face and they say 'we can still come to the markets', but the levels, especially at the longer maturities, are becoming unbearable."
The spread between Portuguese and German 10-year bond yields widened 8 basis points to 440, near the euro-era record of 484 reached on November 11th. Italy's 10-year bonds yielded 5 per cent for the first time since November 2008. Greek 10-year yields and the cost of insuring against a default soared to a record yesterday.
Today's auction attracted bids for 1.6 times the amount offered, compared with a bid-to-cover ratio of 1.9 in the September sale.
"Given the rise of the bond yield over the past week, investors should be attracted," Ciaran O'Hagan, a fixed-income strategist at Societe Generale SA in Paris, said before today's bond sale. "If Portugal estimates it will be able to continue funding itself in the market, it is less likely that it will apply for liquidity support from the EU."
Portugal hasn't auctioned bonds since January 12th, when the debt agency sold debt due in 2014 and 2020. On February 7th, it hired a group of banks to sell €3.5 billion of five-year bonds. Investors have lost about €4 euros for every €100 they invested those securities.
The Portuguese debt agency intends to sell as much as €20 billion of bonds this year to finance the budget and repay maturing debt.
"It's a short-term bond issue and there shouldn't be major difficulties in placing it," said Diogo Teixeira, chief executive officer of Optimize Investment Partners, a Lisbon-based firm that manages €45 million euros in assets, including Portuguese government debt.
Today's auction came before a March 11th meeting in Brussels at which European Union leaders will debate how to construct a comprehensive debt-support package ahead of a summit scheduled for March 24-25th.
Greek 10-year yields jumped 50 basis points to a record 12.83 per cent yesterday, while Spanish yields climbed 10 basis points to 5.48 per cent.
The average debt-service cost for Portugal is about 3.5 per cent. In a projection that assumes "very high" funding costs of 4 percent for the rollover of the entire treasury-bill program and 7 per cent on all bond issuance, Portugal would still have an "implicit funding cost" of less than 5 per cent by 2013, its debt agency said in January. Ireland pays an average 5.8 per cent for its rescue financing.
Bloomberg
