LONDON: Portuguese bond yields resumed their fall towards record lows on Wednesday as Lisbon's first debt sale since it exited a bailout last month drew strong demand from investors.
Portugal sold 975 million euros of 10-year bonds, more than planned, meeting demand for 2.4 times the amount issued. The result suggested limited concern about the constitutional court's rejection last month of a series of austerity measures.
The court decision means Lisbon has yet to receive the last tranche of bailout cash, worth about 2.6 billion euros, though Finance Minister Maria Luis Albuquerque said Portugal could manage without the final payment.
Portuguese 10-year yields fell 6 basis points to 3.31 percent, within a whisker of record lows hit in 2005.
"The Portuguese auction - they sold more than expected and despite choosing a larger amount the bid/cover still looks good," said Christian Lenk, rate strategist at DZ Bank.
"It confirms that some investors wanted to increase their exposure to Portugal despite the constitutional court's decision. We see the usual yield convergence trade continuing."
The performance of Portuguese bonds following the auction might be a sign that yields of other lower-rated euro zone debt could resume their fall after debt sales this week.
Italy plans to sell up to 8.5 billion euros of three-, seven- and 30-year bonds on Thursday, while Spain may also issue a new 10-year bond this week. In the top-rated parts of Europe, Germany sold 3.4 billion of two-year bonds, while France was close to finalising a sale of 15-year inflation-linked bonds.
The large amount of debt on sale this week prompted some investors to book profits on peripheral debt after yields fell to record lows in Spain and Italy following the European Central Bank's latest easing measures.
The ECB cut all its interest rates last week and promised more liquidity for banks, while leaving the door open for a programme of outright asset purchases.
Spanish and Italian yields were 2 bps higher at 2.65 percent and 2.81 percent, respectively.
"A little bit of consolidation was normal, especially with Italy supply in the market," said Luca Cazzulani, a rate strategist at UniCredit.
Grant Peterkin, head of absolute bond returns at Lombard Odier, said he had bought Italian and French bonds on the view that ECB action will compress yields further, even though he felt economic fundamentals did not justify increasing exposure.
"I just don't want to stay in front of the train," he said.
INFLATION CHECK
Analysts doubt a reversal of the periphery's two-year-old rally is close.
Measures of the market's inflation expectations have moved higher since the ECB meeting, but the rise has been too limited so far to suggest the recent rise in bond yields was triggered by a reassessment of the outlook for consumer price increases.
The euro five-year, five-year breakeven forward , closely watched by the ECB, traded near three-month highs at 2.14 percent, but remained more than 10 basis points below 2014 peaks.
The instrument gauges the projected difference between the yields on five-year inflation-linked debt and similarly-dated conventional bonds five years into the future.
It has moved in the direction the ECB would have wanted in the past few days, but only by 3 bps, compared with a rise of roughly 10 bps in nominal 10-year yields - not enough to be considered a significant repricing of long-term inflation expectations.
"The rebound is too small to come to that conclusion," said Ralf Umlauf, an analyst at Helaba Landesbank Hessen-Thueringen. "We think the rise in yields is mainly driven by profit taking."
Comments
Comments are closed for this article.