Portuguese Bond Gains Eclipse Safe-Haven of Bunds: Euro Credit
Portuguese bonds are leading gainers among European sovereigns, trumping the safe-haven appeal of German bunds even as the euro-region’s debt crisis approaches its fourth year.
In the first seven months of 2012, Portuguese debt returned 28 percent, the most of 26 markets tracked by indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds rose 4.1 percent and Spanish debt fell 5.1 percent. The yield on Portugal’s benchmark 10-year bond has declined by 7 percentage points since late January.
“There is still juice left for investors,” said David Schnautz, a fixed-income strategist at Commerzbank AG in New York. “For those that are more risk tolerant, there is still value in Portuguese bonds. At the end of the year, yields should be lower than they are right now.”
Portugal’s progress in meeting the terms of its 78 billion- euro ($96 billion) bailout has helped sustain bonds, even after neighboring Spain sought aid in June, fueling contagion concerns. Prime Minister Pedro Passos Coelho aims to regain access to bond markets by September 2013, and has said he can count on further support from the European Union and the International Monetary Fund should “external reasons” leave Portugal cut off from investors.
The sovereign-debt crisis has forced five euro nations to seek rescues. On June 25, Cyprus became the latest to request a bailout since Greece triggered the European crisis almost three years ago. The petition came weeks after Spain sought 100 billion euros to shore up its banks.
Portugal’s 10-year bond rate is at about 11 percent, while two-year debt yields 7.4 percent, down from records of 18 percent and 22 percent respectively at the end of January. The difference in yield investors demand to hold Portugal’s 10-year bonds over German bunds has narrowed to 9.5 percentage points from 16 points on Jan. 31. Germany sold five-year notes on Aug. 1 at an average yield of 0.31 percent, the lowest on record.
“In fixed-income portfolios, you have to ask the question why would you invest in government bonds at the moment when nominal and real yields are exceptionally low,” Robert Parker, a senior adviser at Credit Suisse Asset Management, said in a Bloomberg Television interview. “My answer to that is you can have selective minor positions in Europe where bailout programs are working, like Ireland, like Portugal.”
While Greece needed two elections this year to form a government, the coalition led by Passos Coelho is cutting spending and raising taxes with the backing of a parliamentary majority elected a year ago. Portugal has had four successful quarterly reviews of its bailout program.
“Portugal is doing very well in terms of reforms,” Schnautz said. “Portugal is getting good grades with each report. There’s still a way to go.”
The IMF projects Portugal’s debt will peak at about 118.5 percent of gross domestic product in 2013 and decline to less than 80 percent of GDP by 2030. The projection assumes annual economic growth of 2 percent and medium- and long-term borrowing costs of 7 percent when the country regains access to markets in 2013, declining gradually to 5 percent over the next four years.
Standard & Poor’s cited the government’s compliance with terms of its aid program on Aug. 2 when it affirmed Portugal’s BB long-term credit rating, the second level below investment grade.
While many European banks have been hobbled by losses from government bonds, Portuguese lenders have benefitted in recent months. Banco BPI SA (BPI) of Porto, Portugal, had potential gains of 80 million euros to 90 million euros from its bond holdings, primarily purchased in the first half.
“Portuguese government bond prices were quite depressed at the beginning of the year,” Chief Executive Officer Fernando Ulrich said on July 25. “Now they are quite a lot better.”
Banco Espirito Santo SA (BES) had “potential gains” of 100 million euros on its Portuguese debt in the first half. Espirito Santo CEO Ricardo Salgado said March 6 that the Lisbon-based bank was “slowly” buying longer-maturity bonds. Norway’s sovereign wealth fund said May 4 that it sold all its Irish and Portuguese government debt.
Banco Comercial Portugues SA (BCP), also based in Porto, will continue to “moderately” buy local sovereign debt, Chief Executive Officer Nuno Amado said on July 27.
Return to Market
The low volume of Portuguese bond trading may discourage some investors from betting on a continued rally. Trading fell to an average 15 million euros a day in June from 38 million euros a day during the same month of last year, according to the debt agency. Turnover of the securities averaged 93 million euros a day in June 2010.
Portugal is “sounding out” the market as it prepares to resume sales of medium-term notes, Joao Moreira Rato, chairman of the country’s debt agency, said in an interview last month.
The Portuguese government plans to issue notes with maturities of one to five years that are designed for specific creditors, the IMF said in a report released July 17. The government also may sell additional treasury bills with maturities of more than one year in the coming months, the Washington-based fund said.
The IGCP, as the Lisbon-based debt agency is known, sold 1 billion euros of 18-month bills on April 4, the longest maturity auctioned since the country requested the bailout in April of last year, at an average yield of 4.537 percent. On July 18, Portugal sold 1.25 billion euros of 12-month bills due in July 2013 at a rate of 3.505 percent, the lowest since November 2010. That was less than the 3.918 percent Spain paid on similar maturity debt a day earlier.
“Despite fears of a spillover from Spain, you could see Portuguese bonds perform well even if pressure in Spain increases,” Commerzbank’s Schnautz said.
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