Portugal Passes Market Test At A High Price

No doubt, Portugal trumped the market with its much anticipated bond auction Wednesday.

Those parts of the market which doubted its ability to do that, need to accept the reality of the state’s successful sale.

Even so, does anyone believe that the euro zone’s ‘peripheral’ countries [including Portugal] are in the clear, as regards ability to fund themselves in the financial markets?

Perhaps some do; personally, I think it would be a stretch.

Let’s briefly look into Wednesday’s auction results, firstly at the yields achieved at the auctions.

Yes, they were slightly lower than those in the market ahead of auction, however, the absolute level achieved was high. Many economists have used the term “unsustainable,” to describe Portugal’s current yield levels. They are certainly expensive.

Wednesday, the interest rate on PGB Oct14 reached 5.39% on average, 6bp lower than the market ahead of the auction (5.45%). But the cost of funding is still 135bp higher compared to the last auction of the same bond back in October.

And at the longer end,  PGB Jun20 went at an average yield of 6.71%, 6bp lower than the market ahead of the auction (6.77%). At this maturity the cost of funding has decreased by 9bp compared to the last auction in November. That’s an encouraging easing, but, still not a comfortable yield.

Additionally, now we know something about the approximate near-term costs for Portugal, shall we think about its near-term commitments.

EUR1.249 billion was raised Wednesday, ahead of EUR4.5 billion worth of redemptions due in April and EUR4.9 billion in June.

Not to mention EUR3.4 billion due to be repaid by the Treasury [in bills] in January, EUR3.5B in February and EUR3.8B in March.

Portugal’s next auction is of a one-year bill Wednesday January 19.
 
The next test for the euro zone as a bloc is actually tomorrow, Thursday, when Spain and Italy are in the market.
 
Spain will offer EUR2-3B worth of SPGB 3.25% Apr16, from 0930 GMT.
Italy will offer EUR4-6B in BTP 3% Nov15 and 4.5% Mar26, from 1000 GMT.

The focus will largely be on Spain.

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