Portuguese bond yields rose to euro-era records amid concern a Greek debt writedown being negotiated with investors may lead to a similar deal in Portugal.
The yield on the nation’s 10-year bonds jumped 2.17 percentage points to 17.39 percent. Two-year yields increased 3.83 percentage points to 21 percent yesterday. They rose as high as 21.47 percent. Charging more to lend for shorter periods reflects declining confidence in Portugal’s creditworthiness.
“Some type of private-sector involvement for Portugal is a likely event and that is probably one of the key risks,” Jim Cielinski, head of fixed income at Threadneedle Asset Management Ltd in London, said in an interview on Bloomberg Television’s On the Move with Owen Thomas. “Portugal has been trading off quite markedly.”
Portugal’s 10-year yield is the second-highest in the eurozone after Greece and the spread over German bunds widened 224 basis points to 15.6 percentage points, also a euro-era record.
Credit-default swaps insuring US$10 million of Portuguese sovereign debt for five years rose to an all-time high of US$4.25 million in advance and US$100,000 annually, according to CMA prices at 2:30pm in London. The cost implies a more than 72 percent chance the government will default in that time.
“The concern for the market is that however the Greek situation resolves itself may be a template for what happens with Portugal,” Gary Jenkins, the director of independent credit firm Swordfish Research in London, wrote in a note.
The Frankfurt-based European Central Bank bought Portuguese government bonds yesterday, according to three people with knowledge of the transactions, who declined to be identified because the deals are confidential.
Portugal aims to return to bond markets at the end of next year and Portugese Prime Minister Pedro Passos Coelho has said Portugal would adhere to targets set in the 78 billion euro (US$103 billion) bailout agreed to last year with the EU and the IMF. Should austerity measures fail to lower borrowing costs, international lenders may have to offer more support, he said on Jan. 24.
“If for external reasons that don’t have to do with the fulfillment of the program, Portugal or Ireland aren’t in a condition to return to market on the scheduled date, the IMF and the EU will maintain aid,” Passos Coelho said.