Friday, July 11, 2014

11/7/2014: My comment on Greek and Portuguese bonds pressures

Portugal's Expresso on Greek and Portuguese bond yields with my comment: here.

My full comment in English:

In my view, we are seeing a strong reaction by the markets to adverse news relating to some peripheral euro area countries. 

In the Greek case, much of the rise in bond yields can be attributed first to the persistent uncertainty over the deficit adjustments and the progression of the reforms. The most recent suggestions by some analysts that Greece may require additional EUR2-3 billion over 2015-2016 relating to the news that the country pension fund is now facing an annual EUR2 billion funding gap have triggered some pressure on the country sovereign debt. This was compounded by thin and nervous markets for today's issuance of EUR1.5 billion bond which originally attracted just over 2.0x cover, but saw final demand slump somewhat on generally negative sentiment in the markets. Today's bond was priced at a yield of 3.5% with guidance between 3.5% and 3.625% issued two days ago on Tuesday. This is below the April 2014 5-year bond issue - the issue that attracted EUR20 billion worth of bids and was priced at 4.95%. However, shortly after the issue, secondary markets yields on April bond shot up to 5.10%.

In Portugal's case, the core risk trigger so far has been building up of pressures in the banking sector, and in particular in relation to Espirito Santo International announcement on Tuesday. This pushed Portuguese yields above 4% for 10 year bonds in today's trading. 

Portuguese risks have also put a stop to Banco Popular Espanol contingent convertible bond issue, as well as Spanish construction company ACS plans for an issue.

All in, Greek 10 year bonds closed at 502.0 spread to 10 year German bund up 20.4 bps on yesterday, Portugal's at 276.2 up 22.3 bps, Spanish at 161.8 up 9.2 bps, Italian at 174.1 up 9.3 bps, and Irish at 112.7, up 4.4 bps.

Spreads on 10 year German Bund:

The markets instability is a reminder that while current monetary and investment climates remain supportive of lower yields, markets are starting to show increasing propensity to react strongly to negative newsflows. Investors' view of the 'peripheral' states as being strongly correlated in their performance remains in place, especially for Spanish, Portuguese and Greek sovereigns and corporate issuers. 

The markets are jittery and are getting trigger-happy on sell signals as strong rises in bond prices in recent months have resulted in sovereign and corporate debt being over-bought by the investors. These investors are now staring into the prospect of gradual uplift in US and UK interest rates, weakening of the euro and thus rising cost of carry trades into the European sovereign bonds. At some point in time, these pressures are likely to translate into earlier investors in 'peripheral' bonds starting to exit their positions. 

We are not there yet, but market nervousness suggests that we are getting close to that inflection point.

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