Over in a quiet corner of the eurozone — Portugal’s government bonds have been slowly getting worse:
Yields on five-year and ten-year debt have been hitting fresh eurozone lifetime highs in recent days.
That’s odd, firstly because it’s coming without any big developments in the euro crisis. (There won’t be a decision before March’s EU Summit on how to expand the bloc’s bailout fund).
But secondly, yields have deteriorated even as Portugal is trying to find other ways than debt auctions to finance itself and avoid a bailout. We’d wonder if this is actually now part of the problem.
The syndication of a five-year bond priced on Monday, for instance:
Compared to a debt auction, syndication is supposed to promote debt to investors beyond usual buyers. But as the FT reported on Wednesday, hedge funds who bought the bonds were selling them a day later. Bonds that are syndicated should also provide a way to lock in borrowing costs at a certain level. Well, on Thursday…
RTRS-NEW PORTUGUESE 5-YR BENCHMARK GOVT BOND BID AT 97.361 BELOW REOFFER PRICE OF 99.762 – INDICATIVE REUTERS PRICING
Oh dear.
Less well-known is Portugal’s use of funding instruments other than bonds, which has picked up in pace in 2011:
Again, it’s about reaching out to new investors, but we’ve wondered before whether this is at the cost of making Portuguese government obligations more short-term and less transparent.
The thing is — Portugal’s average interest rate across its debt remains below the level that made Greece’s refinancing efforts unsustainable in 2010, as Nomura’s European rates team pointed out recently. They’re even wondering if a Portuguese bailout might be avoided, based on the summit’s timing. The biggest lumps in the country’s funding profile are actually following the summit (chart via Nomura):
So it looks like the meeting will be a make-or-break moment where leaders have to decide on a bailout. But the failure of the syndication points to bigger problems with seeking long-term investors for bonds.
This thing is just drifting higher. Looks like the ‘If not the ECB, who?‘ question over who can buy this stuff is a good one right now.
Related links:
Sovereign risk and the euro (presentation) - ECB
A guide to eurozone bond auction styles – FT Alphaville
Adventures in Portuguese bond shorts - FT Alphaville