Portugal Yields Tumbling

April 17th, 2014 6:38 am | by John Jansen |

The search for yield has driven bond buyers to Portugal which until recently was considered a financial leper. Yields on 10 year bonds in Portugal fell 12 basis points yesterday and according to a trader whose note inspired me to write this yields are down another 6 basis points this morning. Some of the decline in yield is anticipation of ECB purchases and some of it is demand from Asia in which investors think Portugal is cheap to Spain.

Here is a cut and paste job of an FT story on the topic

April 16, 2014 6:02 pm

Portuguese bond yields tumble on ECB QE hopes

By Ralph Atkins in London

Portuguese government borrowing costs have tumbled to fresh multiyear lows as investors increasingly price-in the launch of quantitative easing by the European Central Bank.

Yields on 10-year Portuguese bonds, which move inversely with prices, fell 12 basis points to just 3.75 per cent on Wednesday, the lowest since late 2009. The falls follow increasingly strong hints by ECB policy makers that the central bank is preparing a large-scale asset purchase programme – or quantitative easing – to head off possible deflation threats in the eurozone.

Annual inflation in the bloc was on Wednesday confirmed at just 0.5 per cent in March, the lowest for more than four years. Yields also fell on Spanish, Italian and Greek debt.

Earlier, Lisbon issued 12-month and nine-month Treasury bills at record low interest rates. Portugal plans to exit its international bail out programme later this year.

Eurozone sovereign bond markets have rallied strongly in recent weeks – even though Mario Draghi, ECB president, has hinted that the central bank would prefer to buy private sector assets under any QE programme, such as bank loans packaged into asset-backed securities.

“They have come out with little in the way of real detail of how QE would work in the eurozone. But the fact that it is something they are considering at all is enough,” said Huw Worthington, bond strategist at Barclays.

A widespread belief in financial markets is that to have a sufficiently powerful effect, the ECB would have little option but to buy government bonds in addition to private sector assets. However the ECB might not necessarily target the bond markets of governments on the eurozone’s periphery, argued Steven Major, head of fixed income research at HSBC, in a research note.

“For all countries to get the benefit of lower yields it may be better to concentrate purchases in the core, led by the [German] Bund market. This would then rely on private sector asset managers to continue the ‘hunt for yield’ and drag periphery yields still lower,” Mr Major wrote.

Falling eurozone bond yields have raised fears among some investors that markets are overestimating the chances of the ECB implementing QE and its likely scale, and recent days have seen some profit-taking.

“There has been some profit-taking in the periphery, and you would think that as we approached the level where QE was priced in, there would be more profit-taking. But so far the balance of demand has remained positive,” said Laurence Mutkin, head of global rates strategy at BNP Paribas. “Has the rally gone too far? Certainly ‘risk to reward’ has changed – but that doesn’t mean QE trades don’t have further to go.”

Portuguese bonds were proving particularly attractive to Asian investors because of the spread over Spain, where 10-year yields are now barely 3 per cent, reported one banker.

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