Portugal's new bonds wobble but bailout exit seen on track

Wed Jan 30, 2013 8:27am EST

Related Topics

* Portuguese bonds struggle to maintain momentum after sale

* Post-issue weakness shows hunger for high yield fading

* Peripheral sovereigns' funding progress still on track

By William James

LONDON, Jan 29 (Reuters) - Newly-issued Portuguese bonds have fallen in value since their sale last week, suggesting investors' so far ravenous appetite for higher-risk euro zone sovereign bonds may have been sated for now.

Portugal's first bond sale since its 2011 international bailout generated a massive 12 billion euros of demand for the 2.5 billion euros of debt issued, and came hot on the heels of equally-popular syndicated sales from Spain, Italy and Ireland.

Such a large, quick-fire injection of risky debt, along with a perception that the euro zone debt crisis is far from over, has tested the limits of how much risk the market is prepared to take on and hit prices on the Portuguese bonds, analysts said.

This should put the brakes on the fundraising drive by the region's riskier states, but the wobble was not seen as a major threat to Lisbon's plans to fund itself through the market later this year and exit its bailout without further support.

"In the very near term the market will have to digest this chunk of supply, there's a lot of paper there... especially for a market like Portugal which is rather illiquid," said Commerzbank senior strategist Michael Leister.

"Nevertheless this paves the way for more primary market action. Clearly it shows they are on the right track for market access and ultimately there is demand."

Portuguese bonds command a higher risk premium than bonds from any other euro zone country bar Greece.

Last week's issue was sold with a re-offer price of 97.751 before quickly sinking to 96.453. It last traded 0.5 percent lower at 97.265 and still weaker than at the sale when compared with the "risk-free" euro swap curve.

In part this represents a broad halt in the rally in bonds of the euro zone's weaker states, but the 2017 paper has also underperformed other Portuguese issues of similar maturity since it was reopened last week.

Dealers said high turnover in the bonds in the immediate aftermath of the sale was a sign that some speculators looking for a fast profit had quickly dumped the bonds they had been allocated.

Hedge funds took up 24 percent of the new issue and, after a roadshow heavily targeting U.S. and emerging market investors, 93 percent of the bonds were sold to accounts based outside Portugal.

"Until the bonds are placed properly you have the short-term flippers who are in for a quick profit. Until they're out of their positions and the bonds are placed with actual end users then they won't trade particularly well," one trader said.

Portguese Prime Minister Pedro Passos Coelho said on Wednesday the country's 2013 financing needs were covered while Finance Minister Vitor Gaspar said Portugal would seize opportunities to issue new bonds, but was not in a hurry to do so.

Analysts say a rise in Spanish and Italian bond yields off lows seen in early January was a sign the window for high-risk issuance may be closing as a lack of growth in the euro zone and political risks in Italy return to the fore.

The precipitous fall in Greek bond yields was also running out of steam with investors still nervous that the country could yet end up leaving the euro zone.

"In the near term I wouldn't expect more supply here but once the Italian elections are through and March draws near Portugal might well give it another go if the market environment is right," said Commerzbank's Leister said.

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