Portuguese Bond-Yield Spread Widens to Record Before Tomorrow's Debt Sales
By Keith Jenkins - Nov 9, 2010 5:58 PM GMT+0100 Tue Nov 09 16:58:48 GMT 2010
Portuguese 10-year bond yields rose to a record relative to German bunds before a debt sale tomorrow as concern grew that some euro-area peripheral nations will fail to reduce their budget deficits.
The difference in yield, or spread, between 10-year Irish bonds and similar-maturity bunds widened to a record 554 basis points, or 5.54 percentage points, even after European Union Economic and Monetary Affairs Commissioner
Olli Rehn said Ireland hasn’t asked for aid. Greek bonds rose as the nation sold 390 million euros of 26-week Treasury bills.
The Portuguese auctions “represent the tangible risk event of the week for the peripherals,” according to
Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “I don’t envisage any buying going on ahead of that event risk, so it’s natural to see some concession building.”
The yield on the 10-year bund, Europe’s benchmark government security, rose three basis points to 2.42 percent at 4:47 p.m. in London. The 2.25 percent security due September 2020 fell 0.29, or 2.9 euros per 1,000-euro ($1,387) face amount, to 98.54. The two-year yield was one basis point higher at 0.93 percent.
The Portuguese-German yield spread narrowed seven basis points to 432 basis points after earlier widening as much as 20 basis points to 4.52 percentage points, the most ever.
Irish bonds weakened for the 11th consecutive day, their longest run of declines since January 2009. The yield on Irish 10-year bonds rose eight basis points to 8.11 percent, extending yesterday’s 21 basis-point gain.
Portuguese Auction
Portuguese bonds weakened as market participants prepared for tomorrow’s auction of as much as 1.25 billion euros of debt maturing in 2016 and 2020. The 10-year yield reached 7.02 percent earlier today, the highest on record, according to Bloomberg generic data.
Portugal has completed “more than 93 percent” of this year’s funding requirements and this week’s auctions will be the last in 2010,
Alberto Soares, president of the nation’s debt agency, said yesterday. Soares was speaking from Lisbon with
Andrea Catherwood on Bloomberg Television’s “The Pulse.”
Greek 10-year bond yields fell for a second day, sliding eight basis points to 11.45 percent. Greece sold 390 million euros of 26-week Treasury bills at a yield of 4.82 percent, the country’s debt agency said today. Investors bid for 5.15 times the securities offered.
‘Financial Backstops’
“I can only say that Ireland has not requested the activation of any European financial backstops,” Rehn said at a press conference in Dublin late yesterday. He indicated that Ireland may have to abandon the tax policies that helped foster its decade-long economic boom, reiterating that the country couldn’t continue as a “low-tax” economy.
Ireland is struggling to convince investors it can avoid a rescue as the nation’s finances buckle under the weight of saving
Anglo Irish Bank Corp. Goldman Sachs Group Inc. Chief European Economist
Erik Nielsen said yesterday there’s a “big probability” that Ireland and Portugal, which is also trying to cut its deficit, will turn to the EU and the International Monetary Fund for help.
“These funding costs that you’re seeing right now are clearly not sustainable for countries that are not going to grow that fast for some years,” Nielsen said in an interview on Bloomberg Television’s “Midday Surveillance” with
Tom Keene.
Spanish Premiums
Rehn said he backed the government’s plan to narrow the deficit by 6 billion euros next year, and the state should be given space to formulate its four-year plan to fix the shortfall.
Investors should sell five-year
Spanish bonds, betting the widening yield premiums demanded for Irish and Portuguese debt will also spread to securities issued by the larger Iberian nation, HSBC Holdings Plc said.
“At most risk to further contagion are the markets of Spain, Italy and Belgium, because these countries are unlikely to grow strongly enough to avoid the fiscal arithmetic becoming more challenging,”
Steven Major, global head of fixed-income research in London, wrote in a research note dated yesterday.
Purchases by the ECB of government bonds issued by peripheral nations are “puny” and “of little help” as bond- yield premiums over German bunds increase, according to Societe Generale SA.
‘Cold Storage’
“We are heading towards putting some bond markets into a prolonged period of cold storage,” as is already the case with Greece,
Ciaran O’Hagan, a fixed-income strategist in Paris, wrote in a note to investors today. “We maintain our recommendation to avoid the riskier sovereigns.”
The ECB resumed government-bond buying last week, completing 711 million euros of purchases after reporting no settled transactions for the previous three weeks.
German bonds have returned 8.7 percent this year, compared with an 8.9 percent gain for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Austrian bonds returned 9.6 percent, while Greek debt lost 18 percent, the indexes show. Irish securities declined 11 percent and Portuguese bonds fell 9.2 percent, according to the indexes.
(Bloomberg)
