Crisis worries linger in Portugal

Thursday 04 July 2013 18.01
Portugal sees short-term borrowing costs increase
Portugal sees short-term borrowing costs increase

An improvement in Portuguese borrowing costs, driven by government attempts to defuse its political crisis, was short-lived today as investors fretted over its ability to end its bail-out.

Two-year Portuguese yields jumped 41 basis points to 5.9% as investors sold and five-year yields rose to the psychologically important 7% level.

Ten-year yields rose 6 basis points to 7.59%, finishing at 7.27%.

Financial markets widely consider 7% to be unsustainably expensive if bond yields remain there for a period of time.

Portugal is already subject to a European Union/International Monetary Fund bailout because raising money on regular markets became too pricey.

The resignation of two ministers this week, triggering prospects of a new election being fought over continued budget austerity, saw Portugal's 10-year sovereign yields spike yesterday above 8%, to near the levels at which it was forced to seek the bailout two years ago.

Today's yield rise was greater in shorter-dated bonds, suggesting investors are concerned about the country's ability to service its debt and, tentatively, about the potential losses to the private sector should Portugal have to restructure.

The difference between ten and two year bond yields in Portugal has fallen more than 100 basis points in two days.

Traditionally, longer-dated bonds offer a comfortably higher return than short-dated ones to compensate investors for the risk of holding an asset over a longer period of time.

Meanwhile, the turmoil in Portugal has dented investor appetite for other lower-rated debt, but Spain easily sold bonds albeit at a higher cost to the sovereign.

Madrid raised €4 billion at an auction today - at the top end of its target.

The new five-year bond attracted bids worth 1.7 times the amount on offer, while demand for a three-year bond was 3.5, higher than this year's 2.56 average.