Bonds: Portugal under the microscope

Date: Monday 30 Jan 2012

These were the yields and movements on the 10 year bonds of some of the most watched countries by the close in Europe:

Italy: 6.09% (+20bp)
Spain: 5.04% (8bp)
Portugal: 17.39% (217bp)
France: 3.02% (-1bp)
Germany: 1.79% (-7bp)
UK: 1.99% (-8bp)
US: 1.83% (-6bp)

Today the nascent recovery in European debt markets hit a major bump.

Talks between Greece and its private sector creditors appear to be nearing a conclusion but we’ve been hearing that for weeks. The market has already priced in any settlement. The attention is now shifting to the second Eurozone country to receive a bailout: Portugal.

Portuguese 10 year bond yields jumped 217 basis points during the day, as investors began to believe it, too, will have to negotiate a bond swap. That will not be much fun for the banks and hedge funds which lent the country money.

Also pressing down yields in the low risk countries like Germany, the UK and the US are concerns over the EU summit beginning this evening in Brussels.

The market is not hopeful that a "game changing" announcement will emerge from the meeting and so is seeking safety.

The main talking points in the Belgian capital are tougher budget rules within the Eurozone and the structure of a new bailout fund for the single currency area.

Italy did manage to complete an auction of €7.5bn worth of bonds but only just.

Of the total sold, the majority (€3.57bn) were 5 year bonds which went at an average yield of 5.39%. The auction did not reach its maximum target and the bid to cover ratio was a rather miserable 1.3.

BS

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