The announcement of a sale of bonds from Portugal on Thursday drove investor worries on Friday as concerns over demand surfaced in the market. Portugal, Spain and Italy are all due to hold bond auctions in the week to come, and worries are that demand will not be there.
According to a Reuters report, Orlando Green, strategist at Credit Agricole in London, "With the euro zone's three weakest issuers coming to market next week in the space of two days it ramps up the tension." He added, "There has to be some repricing to get [the auctions] done, but will it be enough? That depends on investor appetite."
After the announcement about the Portuguese sale, yield spreads increased against the German Bund for peripheral states. Spreads on 10-year bond yields increased against the Bund throughout the region, with the Portuguese spread against the Bund standing at 438 basis points, out 18 basis points for the day. Italian bonds, considered the region's benchmark, outperformed Portuguese bonds by 45 basis points in 2011.
The gap between Belgian and German debt also hit its widest since early December, coming in at 126 basis points, up 8, as worries that Belgium will fail to form a government added to its public debt woes.
While Portugal is regarded as the next most likely nation to have to seek a bailout, all three nations holding sales next week could be in jeopardy if demand is not adequate at the upcoming auctions. The ongoing debt crisis ignited with first Greece and then Ireland being basically frozen out of the debt market; with no funds coming in to support them, they were forced to seek rescue from the European Union (EU) and the International Monetary Fund (IMF).
Another concern driving demand lower for weaker euro zone nations is the fact that the EU has proposed that investors share losses on economic failures come 2013. While that would not affect any current bonds, the prospect has unnerved markets, which are accustomed to the intervention of the European Central Bank (ECB) and IMF to ensure that banking sector weakness and high national debt do not impact investments.
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