Portuguese Bond Yields Rise

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."