March 6, 2012

Portuguese Bond Yields Rise

Talk of second bailout grows louder

Portugal may be in need of a second bailout–or so it seems from its sovereign bond yields, which have risen steadily despite a flood of cash from the European Central Bank that is flowing to other investment targets.

Bloomberg reported that 10-year yields on Portuguese bonds have increased by nearly two percentage points in the past two weeks, and in Tuesday morning London trading had hit 13.85%–up from 7.48% at this time last year. It received a bailout of 78 billion euros ($102.8 billion) in May of last year.

Stuart Thomson, who helps oversee the equivalent of $110 billion as a portfolio manager at Ignis Asset Management in Glasgow, was quoted saying, “The ECB’s cash provides liquidity, but not solvency. If the perception is that a country is already bankrupt, these liquidity measures won’t work. There is growing concern that Portugal may need a second bailout.”

Portugal’s government has been able to continue to issue bills, although it has been unable to sell debt with maturity of longer than a year since its bailout. It plans to re-enter the bond market in 2013, something the International Monetary Fund said Monday it should be able to do, but some experts disagree.

Pavan Wadhwa, global head of interest-rate strategy at JPMorgan Chase & Co. (JPM) in London, was quoted saying, “That’s not going to be possible. The Portuguese 10-year yield is near 15%. No one goes to the market at that level. Once your yields go above 8%, there’s no turning back.”

Although Portugal’s 10-year yields hit a euro-lifetime high of 18.29% on Jan. 31, its bill sales have actually seen borrowing costs fall. So far in 2012 the country has successfully sold 8 billion euros ($10.5 billion) in bills, which is higher than its announced target of 6.5 billion euros for Q1 that the government called for on Dec. 29. It has also put out bills with longer maturities than originally planned.

Although the yields on Spanish and Italian bonds have fallen since December, with some believing that ECB-provided funds from its December round of loans are being used to buy them, Portugal’s junk ratings from the big three ratings agencies may be putting off investors who might otherwise consider them–particularly in light of Greece’s situation, in which private bondholders may be compelled to accept haircuts on the debt they hold.

Despite the pronouncement by European officials in December that Greece’s situation is “exceptional and unique,” Wadhwa said, “There is concern that a Greece-style bond restructuring will be required if Portugal were to take the second bailout. Our baseline scenario is that they will need a second bailout. Bills are short-term securities used mostly for cash management and are likely to be excluded from debt restructuring.”

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