LONDON: Portuguese and Spanish yields edged up on Thursday before bond sales from the two countries were expected to draw good demand from investors enticed into euro zone periphery debt by an improving economic outlook.
Portugal is taking advantage of benign market conditions and a fall in its yields to sell five-year bonds via a syndicate of bonds as it seeks to prove it has full market access before a planned exit from an international bailout later this year.
Spain will auction up to 5 billion euros ($7 billion) of new five-year bonds, hoping to capitalise on improved investor sentiment after years of surging financing costs to successfully kick off a busy 2014 funding programme.
Strong demand on Tuesday for Ireland's first bond sale since it exited its EU/IMF bailout boded well for the bond sales and analysts expected Spanish and Portuguese yields to resume their falls once they are out of the way.
Expectations that the European Central Bank will keep interest rates low for a long period, or even cut them further, have supported high-yielding euro zone bonds.
The ECB is seen holding interest rates at a record low 0.25 percent after its meeting on Thursday while reiterating it will ease policy if inflation stays too low or money market conditions tighten too much. Portuguese 10-year yields were last 3 basis points up at 5.47 percent, a marginal retreat from the 70 bps decline so far this year while five-year yields were 6 bps higher at 4.17 percent.
Spanish 10-year yields were 1 basis point up at 3.89 percent, having fallen 40 bps this year to four-year lows, while five-year yields were a touch up. "Demand for papers is strong in the European bond market. For Portugal it's also to do with better prospects and the fact that Portugal may not need a second bailout plan but may keep the opportunity to ask for a precautionary programme," said BNP Paribas strategist Patrick Jacq.
"The market is positioned for tighter spreads, for the normalisation in the euro zone.
We had some limited signs of economic recovery in these countries or at least that the worst is over.
The global situation is improving." Confidence in most euro zone states' ability to fund themselves easily in secondary markets this year is in sharp contrast to recent years, when soaring yields risked shutting Italy and Spain - the euro zone's third and fourth largest economies - out of the markets.
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