EuropeanMay 13 2013

Doubts over Portugal bond coup

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Portugal’s return to issuing government bonds is not a clear signal of the country’s economy recovering, according to Threadneedle’s Martin Harvey.

Portugal fully re-entered the government debt market last week, issuing a 10-year bond which raised €3bn (£2.5bn) for the cash-strapped country.

It comes almost exactly two years since the Portuguese government was forced to seek financial support from the ‘troika’ of the European Union, the International Monetary Fund and the European Central Bank, and was handed a €78bn bailout.

Mr Harvey, co-manager of the Threadneedle European Bond and Threadneedle Global Bond funds, said Portugal “has not turned the corner from a fundamental perspective” because its debt was not falling and its economy was still mired in recession. In the past three months of 2012 the Portuguese economy shrank by 3.8 per cent, the eighth straight month of falling GDP.

Mr Harvey added: “Until this point the Portuguese bond market has not proved to have sufficient liquidity to justify holdings, which is partly due to its speculative grade rating status.

“The low rating means that this market is not included in the indices that we use as benchmarks for our European funds, which makes the hurdle higher in terms of justifying a position.”

Portugal’s debt is currently rated at the top end of ‘junk’ bond status by all three major credit ratings agencies. The country’s action last week pushed the yield on its existing 10-year government bonds down below 5.5 per cent, compared with a peak of more than 18 per cent reached in January 2012 at the height of the eurozone debt crisis.

“We think that Portugal’s return to the debt market is a sign that the global liquidity glut and subsequent search for yield is reaching all quarters,” Mr Harvey said.

“The calm experienced in peripheral bonds in the past six months has given investors the confidence to return to these markets, aided by the fact that opportunities elsewhere have become less profitable given the general fall in yields.”

In spite of the success of the bond auction, Portugal’s government must still hit austerity targets to qualify for the next stage of its bailout.

Prime minister Pedro Passos Coelho last week announced €4.8bn worth of cuts to public spending in a bid to satisfy the demands of the EU, the IMF and the European Central Bank and secure the next tranche of bailout money to help it repay €6bn of debt which matures in September.

Stefan Isaacs, manager of the £2.2bn M&G European Corporate Bond fund, said last week’s bond issue was a “signal of improvement” but warned that Portugal still faced similar challenges to Spain and Italy in terms of unemployment, economic growth and productivity.

He added that there was also a risk that the “huge” demand for income-paying assets could result in markets “not charging the appropriate risk premium” for some bonds.

Since the start of the year the yields on 10-year government bonds issued by Italy, Spain, Ireland and Portugal have all fallen, meaning prices have risen as investors regain confidence in the ability of the troubled economies to repay their debt.

Even Greece has seen its 10-year government debt yield fall below 10 per cent, having hit 44 per cent in September last year, which prompted its finance minister Yannis Stournaras to say the country may also return to issuing new bonds by the end of 2014.

PSI All-Share index

Portugal’s main stockmarket, the PSI All-Share index, has risen by 9.8 per cent since the start of the year. But the economy remains mired in a deep recession, and its economic output has fallen by 3.1 per cent since its peak in 2008.