Portugal sells 10-yr bonds, borrowing costs decline

Portugal’s borrowing costs fell at a sale of 10-year bonds, indicating investor concern the country would follow Greece and Ireland in seeking a bailout was easing.

Portugal sold ¤599 million ($778 million) of bonds due in 2020 at a yield of 6.716 per cent, the country’s debt management agency said today. That compares with 6.806 per cent at the previous auction on November 10. The government also placed ¤650 million of bonds due in 2014 at a yield of 5.396 per cent, up from the 4.041 per cent on October 27.

European governments are considering aid for Portugal, debt buybacks, lower interest rates on rescue loans and guarantees against excessive debt as part of a package to quell the financial crisis, according to two people with direct knowledge of the talks.

The plan, which may include a loan to Portugal of about ¤60 billion ($78 billion) and purchases of outstanding Greek debt, would mark an attempt to contain a crisis that has frustrated unprecedented efforts by policy makers to calm markets and raised questions about the health of the 17-nation euro economy.

Portugal is raising taxes and cutting wages to convince investors it can narrow its budget gap after the Greek debt crisis led to a surge in borrowing costs for the most indebted euro nations. Prime Minister Jose Socrates said yesterday the effort had reduced the deficit to less than the 7.3 per cent of gross domestic product forecast for last year. That failed to calm market concerns, with the yield on its 10-year bond closing above 7 per cent for the past four days.

“I think 7 per cent is a very dangerous number and a worrying number,” David Blanchflower, an economics professor at Dartmouth College and a former Bank of England policy maker, said yesterday in an interview on Bloomberg Television’s “InBusiness With Margaret Brennan”.

The difference in yield between Portuguese 10-year bonds and German bunds, Europe’s benchmark, fell 10 basis points today to 387. That spread reached a euro-era record of 483 basis points on November 11.

Investor demand
The debt agency sold at the upper end of the range of ¤750 million to ¤1.25 billion set for the sale. Investors asked for 3.2 times the amount of 10-year bonds sold, up from 2.1 times at the November sale. They sought 2.6 times the 2014 bonds on offer, less than the 2.8 times in October.

The auction was the first bond sale this year by a so-called peripheral nation. Spain offers as much as ¤3 billion of five-year debt tomorrow, while Italy auctions as much as ¤6 billion of bonds due 2015 and 2026. Greek and Italian borrowing costs rose and demand fell at sales of almost ¤9 billion of Treasury bills yesterday.