Yield-hungry investors snap up Portugal 15-yr bond as ECB eyed

Wed Sep 3, 2014 12:24pm EDT

* Portugal bond sale first since bailing out BES

* Relatively higher yields lure investors

* German 5-yr debt sale hurt by shrinking yields, Ukraine (Updates prices into close)

By Emelia Sithole-Matarise and Michael Turner

LONDON, Sept 3 (Reuters/IFR) - Portugal successfully sold on Wednesday its first bond since it bailed out Banco Espirito Santo, with expectations of more monetary stimulus from the ECB spurring yield-hungry investors to snap up the 15-year paper.

Orders for the bond exceeded 8 billion euros ($10.5 billion), more than twice its 3.5 billion euro size, a result which bodes well for Greece's plans to sell new seven-year bonds by the end of the year.

This contrasted sharply with euro zone heavyweight Germany's auction of new five-year bonds where demand was hurt by cooling demand for safe havens after Ukraine said it had agreed with Russia steps towards a ceasefire in eastern Ukraine.

Investors were also turned off by the new debt's meagre yield of 0.25 percent and an exchange glitch, with the auction drawing barely enough bids to cover the total amount offered.

Given the vanishing yields on top-rated bonds and record low borrowing costs for larger peripheral countries like Italy and Spain, market strategists see little problem for the sale as Portuguese bonds still offer relatively higher yields.

The 15-year bond offers a 3.875 percent coupon and was the longest paper sold by Portugal since 2008. It follows Spain's private placement this week of a 50-year bond offering a 4 percent coupon. Long-dated bonds tend to be held by stable but conservative investors like pension funds and insurers, while hedge funds and other trading accounts favour shorter bonds.

The Portuguese debt agency said half of the amount went to UK and U.S. investors, with only 6 percent going to domestic investors. Only 5.7 percent went to hedge funds, with the rest going to banks and other asset managers.

"After the Spanish 50-year placement, (the Portuguese) 15-year sale clearly shows that things are much better for Portugal and shows as well a strong global appetite for yield and for European yield in particular," said Jean-Francois Robin, head of fixed income strategy at Natixis.

"We see a lot of non-euro investors positioning themselves into the euro market and some investors are moving from core market to peripherals."

Portuguese 10-year yields came off the day's highs to trade a touch up at 3.26 percent after the sale.

They slightly outperformed German bonds whose 10-year yields rose 3 bps to 0.96 percent on the news of potential progress towards a peaceful resolution of the crisis in Ukraine.

ECB HOPES

The sale was also a significant milestone for Portugal, which emerged from its EU/IMF bailout in May this year and has been plagued by troubles in its banking sector.

Some analysts say that demand for Portugal's deal will be a truer reflection of investor demand for the country, as a bond of that length is unlikely to be included in any future ECB government debt purchases.

"The market is still in a positive mood in terms of expectations of more stimulus from the ECB ... There's still demand for longer (bonds) due to the low level of rates at the shorter end," said Alessandro Giansanti, a strategist at ING.

Market anticipation of an asset-purchase programme, known as quantitative easing (QE), has reached fever pitch in recent weeks after ECB president Mario Draghi dropped hints of such a scheme at a speech in Jackson Hole, Wyoming in late August.

While many in the market expect the ECB to hold off from QE for now, any strong hints that it is advancing preparations for such a programme are expected to keep euro zone bond yields around historic low levels.

"We think that any sign of disappointment should be faded, especially on peripheral euro zone government bonds as the prospects for a rapid improvement in fundamentals across the euro zone are minimal and hence imply further stimulus by the ECB," Citi strategists said in a note to clients. (1 US dollar = 0.7607 euro) (Editing by Raissa Kasolowsky and Toby Chopra)

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