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Last updated: January 9, 2014 6:15 pm
Portugal issued €3.25bn of five-year debt on Thursday as a wave of positive sentiment towards the eurozone periphery lifted demand for the placement above €11bn.
The strong demand for Portugal’s debt follows a similar welcome for an offer of ten-year Irish government bonds on Tuesday and marks a successful beginning to Lisbon’s efforts to regain full market access before exiting its three-year bailout programme in June.
Eurozone “periphery” countries have seen sharp falls this week in government bond yields, which move inversely with prices, on increased confidence in the stability of Europe’s monetary union. On Thursday, the yield on Irish five year debt fell below the UK equivalent bonds. UK yields have been lifted by speculation the Bank of England may raise interest rates as early as this year.
Manuel Barroso, the European Commission president, declared on Wednesday that 2014 would be the year the eurozone finally put the worst behind it. But Mario Draghi, the European Central Bank president, struck a more cautious note on Thursday, warning it would be “premature” to declare victory and that the eurozone economic recovery remained weak.
Expectations that the ECB will be forced into further monetary policy loosening to head off dangerous deflation risks had added to the downward pressure on eurozone bond yields.
Bankers close to the deal said orders worth €11.2bn were placed for the sale of Portuguese bonds, in which Lisbon had initially been expected to raise up to €3bn.
The price for the “syndicated tap” of an existing bond maturing in June 2019 was set at 330 basis points above mid-swaps, a European pricing benchmark, about 10bp lower than earlier official guidance, the bankers said.
The placement will cover almost half of Portugal’s total financing requirements of €7.1bn in 2014.
The successful issue and strong investor demand will also help Portugal play down fears that it could have to ask for a second bailout after its current €78bn rescue programme ends in the summer.
Justin Knight, head of European rates strategy at UBS, said: “Portugal should not have any problems financing itself unaided in the markets this year.”
“Portugal has covered almost half of its total financing needs for 2014 in early January, placing it in a strong position to manage future issues later in the year,” said Fabianna del Canto, a banker at Barclays who worked on the sale.
The bonds were sold at yield of 4.657 per cent, with orders coming from about 280 institutional investors, most of them outside Portugal, whose investors accounted for only 11.8 per cent of the placement.
“To pay 4.657 per cent on 5-year debt that was trading at around 5.4 per cent at the end of December reflects the extent to which investors see further positive evolution in Portuguese yields,” said Ms del Canto.
Rather than a full second bailout, many economists expect Lisbon to seek additional international support after the current adjust programme ends by negotiating a so-called “precautionary” credit line on which it could draw if issuing debt in the market proved too costly.
Mr Knight said: “We would consider a precautionary conditioned credit line a prudent option.”
Lisbon’s offer follows strong demand for an Irish bond issue on Tuesday that has highlighted increased investor confidence in the crisis-hit economies of the eurozone periphery.
Yields on Portugal’s benchmark 10-year debt have fallen almost 70 basis points this year to about 5.47 per cent.
Joint lead managers for the issue are Barclays, Portugal’s Caixa-Banco de Investimento, Goldman Sachs International, HSBC, Morgan Stanley and Société Générale.
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