Customers use automated teller machines outside a Banco Espirito Santo branch in Lisbon. Portugal’s €78bn bailout expires in May and buying back debt was seen as an indication of its ability to stand on its own feet.
Portuguese yields tumbled yesterday as a plan to buy back bonds maturing in 2015 increased investor confidence in Lisbon’s chances of exiting its bailout programme this year.
Portugal’s €78bn bailout, agreed with the European Union and the International Monetary Fund in 2011, expires in May and buying back debt was seen as an indication of its ability to stand on its own feet.
Lisbon plans to buy back October 2015 bonds – the second such move this year after it repurchased €1.32bn of October 2014 and October 2015 bonds last month in order to ease its redemption burden.
Portuguese two-year yields fell 17 basis points on the day to 1.54%, having hit a four-year low of 1.42% last week. Ten-year yields fell 10 bps to 4.54%, also close to four-year lows.
“The buyback is giving some confidence to investors,” ING senior rate strategist Alessandro Giansanti said. “It improves Portugal’s funding structure and also tells you that they have cash available in the treasury.”
About €5.6bn remain outstanding in October 2014 bonds and some 8.2bn in October 2015. A June 2014 bond worth 4.5bn also matures soon.
Those figures do not look as challenging as they did at the height of the crisis, when Portuguese 10-year yields topped 17%. Portugal has already covered its 2014 funding needs after raising €6.25bn from five- and 10-year bonds via syndication this year.
Better-than-expected economic growth figures and the government’s pledge to maintain fiscal discipline has attracted healthier demand for its junk-rated bonds as well. Foreign investors bought almost 90% of the five-year bonds and almost three quarters of the 10-year bonds at this year’s sales. Demand came mainly from Britain, Scandinavia and the US, data from the debt agency showed.
Worries remain, though, that the country’s constitutional court might prevent further reforms and some analysts expect Portugal to seek a safety net after the bailout, in the form of a precautionary credit line which it can tap if it gets into trouble. Portuguese bonds outperformed all other eurozone debt apart from Greece, whose market is significantly less liquid and regularly sees larger price swings.
Spanish, Irish and Italian yields fell 2-3 bps after eurozone inflation data for February was revised lower to 0.7% from a 0.8% flash estimate - well below the European Central Bank’s target of just less than 2%.
“The picture for ... inflation remains extremely tame and inflation expectations will continue to be closely watched by policymakers at the ECB,” said Annalisa Piazza, market economist at Newedge Strategy. German 10-year Bund yields, the benchmark for eurozone borrowing costs, inched higher to 1.56%, but kept close to Friday’s eight-month lows of 1.506%.
Assets perceived as safe havens remained in demand due to tensions between the West and Moscow over the Crimean region’s 96% vote in favour of joining Russia at the weekend.
Western powers have said the vote in the southern Ukrainian province, which came after Russia effectively occupied it after Ukrainian President Viktor Yanukovich was ousted, is illegal and that they will impose sanctions on Russia.
“The market to some extent expects sanctions now. It depends on what kind of sanctions and (Russia’s) reaction to the sanctions to see if we can talk of a de-escalation of the crisis or not,” said Piet Lammens, a KBC strategist in Brussels.
