There’s a fresh lifetime high for the Portuguese 10-year bond yield on Thursday — now well on its way towards 8 per cent:
Although the country is now missing a government, the concern is not so much with current yields, as to how Portugal can get some heavy issuance away in the months taken to hold fresh elections. Here’s an observation from Nomura’s rates strategists:
The Portuguese asset swap curve is currently inverted around the 3-year sector, illustrating the signs of stress that were prevalent in Greek and Irish curves leading into bailouts. Having said that, given the good budget execution in January-February 2011, we believe it has enough cash to for the €4.3bn mid-April redemption and possibly the cash deficit in May as well, but it will have to access markets again (or get a financing package) to cover financing needs in June, when it faces a €4.9bn redemption. Moreover, the IGCP is due to present their Quarterly Funding plan at the end of the month. We anticipate new bill issues (while none are being redeemed) as a means of pre-empting any June redemption concerns…
(More bill issues = more short-term debt = more refinancing humps further down the line, no?)
As usual, we doubt that auctions will fail — it’s just still a question of who is going to buy Portuguese paper now. The immediate Chinese reaction to Portugal has been equivocal to say the least.
There’s all sorts of complications that also arise from even a few months’ stasis in Portuguese government debt — notably, banks’ capitalisation plans come out in April, while state-back corporate financing needs remain paralysed.
Not very nice when the road kicks the can back, is it?
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About those margin calls
We’ve been watching the thresholds for whether Portuguese bond trading could be subject to higher margin requirements given how yields keep on rising.
No developments there yet… but as for Irish bond yields, those have taken on an inverted bungee jump formation on Thursday morning:
A move not helped by the following statement from LCH.Clearnet on Thursday:
In accordance with the Sovereign Credit Risk Framework and in response to the yield differential of 10 year Irish government debt against a AAA benchmark, LCH.Clearnet Ltd has revised the risk parameters for Irish government bonds cleared through the RepoClear service.
The additional margin required for positions of Irish government bonds will consequently be increased to 35% for long positions; this amount will be adjusted for the current bond price. Short positions will pay a proportionately lower margin.
This decision is based solely on publicly available yield spread data and in no way represents a forward looking market view.
LCH.Clearnet will continue to monitor yield spreads closely and keep the parameters under close review in accordance with the Sovereign Credit Risk Framework. The additional margin will be reflected in a margin call/repayment on Friday 25 March 2011. Report 74 (available on the LCH.Clearnet Member Reporting website) will detail any further changes in the margin levels charged under this framework.
The threshold into margin call territory is a 450 basis point spread between government 10-year bonds and a Bloomberg index of other similar dated euro benchmarks.
Ireland’s spread was 660bps at pixel time. Yikes.
By Izabella Kaminska and Joseph Cotterill
Related links:
Portugal on the brink - FT Alphaville
ESM panic! Subordination, restructuring, CDS, oh my! - FT Alphaville