The most expected yet anticlimactic bond auction for 2011 has come and gone: after getting the backstops of the ECB, China and most recently, Japan, Portugal managed to sell €1.25 billion in 4 and 10 year paper. And while the the yield on the 10 year was better than expected, and notably lower than the 7% where the point had been trading on the curve recently, the 4 year priced notably weaker compared to previous. Of course, none of this would have been possible had the ECB not been buying Portuguese bonds in the open market for two days this week, and continuing into Wednesday, into the biggest farce of a market currently operating in Europe.
The results were as follows:
- €650 MM in Oct 2014 bonds at 3.6%; bid-to-cover of 2.6 vs. Prev. 2.8 (yield 5.396% vs. Prev. 4.041%)
- €599 MM in Jun 2020 bonds at 4.8%; bid-to-cover of 3.2 vs. Prev. 2.1 (yield 6.716% vs. Prev. 6.806%)
And just as the market was digesting the results, the EU announced that it is considering bond buybacks, Portuguese aid and debt limits at talks in the next week.
The EURUSD while decidedly weaker this morning, has not traded much on the news:
Also the reason futures are surging as per usual, is more talk of socialized risk out of Europe, and little to do with the "successful" auction. From RanSquawk:
European bourse traded higher throughout the session, led by the Spanish IBEX 35 and Italian FTSE MIB indices, following comments from sources and EU’s Rehn that the effective lending capacity of the current European financial stability facility should be reinforced and its scope of activity widened. Early market talk that primary dealers would fully underwrite today's Portuguese debt auction, as well as continued economic growth in Germany was also noted, and in turn weighed upon bunds, which came under further pressure following a well received Portuguese debt auction, allied with comments from the EU that it will consider European peripheral bond buybacks, Portuguese aid, and debt limits in talks next week. The EU also said that it will seek a comprehensive plan to stem the debt crisis in the next meeting.
European peripheral 10-year government bond yield spreads with respect to bunds generally tightened across the board due to easing Eurozone concerns. It is also worth noting that according to Portuguese finance ministry, foreign interest in the Portuguese bond auction was 80%. In the forex market, EUR/USD moved higher leading up to the Portuguese auction, however pared back earlier gains on profit taking after well-received Portuguese data.
And some more commentary on the auction via Asymptotix:
Markets had been watching closely to see how easily - or not - the debt-hit nation could raise funds. Yields had hit a recent fresh high on its 10-year bonds of 7.3%, before falling to 6.77% on Wednesday morning before the auction. The sale was seen as a measure of Lisbon's ability to raise funds on the financial markets after its debt and deficit problems raised the amount it had to pay to borrow cash.
Bond buying by the European Central Bank (ECB) had helped keep the yield below 7%.
"Probably the most important thing for the 10-year yield is that the 7% level was not breached," said Michael Leister, of West LB in Duesseldorf.
"The ECB have been very active in past days stabilising the market and sentiment. "
"It remains to be seen over the coming trading session whether this will be a turnabout for Portugal and whether recent spread tightening can be sustained."
The four-year bond yield was 5.396%.
There has been speculation Portugal could join Greece and the Irish Republic in needing an international bail-out, something it has denied. The country's borrowing costs have surged as investors worried over its financial health. Lisbon has argued its situation is different from Greece and the Republic of Ireland - both of which have agreed to bail-outs from the European Union and International Monetary Fund. It says that its deficit and debt are lower than those nations, that it has not suffered a bubble in property prices and that its banks are sound. And the European Commission has said there are no discussions under way on an EU-International Monetary Fund bail-out of Portugal. However, some analysts still believe the country will need to seek funding help.
"Our country analysts still forecast that Portugal will be required to receive funds from the emergency credit facility," said Kevin Dunning, economist at the Economist Intelligence Unit.
"And there is a high risk that if the interest charged on those funds is as high as for Ireland, this will slow Portugal's efforts to reduce its budget deficit."
Analysts believe that while Europe could support Portugal, a bail-out of Spain would stretch the existing bailout fund. Greece was the first eurozone nation to take a bail-out when a three-year 110bn-euro deal was agreed. The Irish Republic's 85bn-euro bail-out package was agreed last month. A debt sale due on Thursday by Spain will also be closely watched by investors.