(Adds comments, updates prices)
By John Geddie
LONDON, April 22 Portuguese debt yields held
just above eight-year lows on Tuesday as Lisbon prepared to
auction bonds this week, the first auction in three years.
Wednesday's 750 million-euro sale of 10-year bonds, which
will follow a series of syndicated bond offerings since early
2013, will help show that the country can finance itself after
its planned exit from an EU/IMF bailout on May 17.
"It is part of Portugal's long road back to becoming full
market participants," said Luca Jellinek, a credit strategist at
Credit Agricole. A strong auction should pull down borrowing
costs in Portugal and the rest of the euro zone periphery, he
Portuguese 10-year bond yields dipped 1 basis
point to 3.73 percent early on Tuesday. It pared those gains as
the morning progressed, but yields still hovered just above
eight-year lows of 3.66 percent reached last week.
Other peripheral bond markets also edged back towards
multi-year lows, tightening the gap with core markets, which
came under some early selling pressure.
German 10-year yields - the euro zone benchmark
- opened 2 basis points higher at 1.53 percent. The Greek
equivalents, meanwhile, were the best performers dropping 10bp
to sit just above four-year lows at 5.98 percent.
Traders said speculation that the European Central Bank will
begin an asset purchase programme to ease deflationary pressure
in the euro area was buoying appetite for riskier assets,
outweighing concerns that an international agreement to avert
wider conflict in Ukraine was faltering.
The latest health check of the euro zone's manufacturing and
services sector - April flash PMIs released on Wednesday - will
be closely watched for clues of any potential ECB action.
Portugal's prospects for accessing funding in the markets
were "very promising", said the IMF's mission chief for the
country, Subir Lall, after Portugal passed the latest review of
its bailout programme.
The IMF praised Portugal's efforts to narrow its budget
deficit, but high unemployment and lagging competitiveness in
exports are still holding back its recovery. Those issues have
not dulled demand for its debt, however, as investors hunting
for higher returns in an environment of low official rates.
"It seems to me that investors are quite willing to finance
governments that have enormous structural problems nowadays,"
said Stephen Lewis, chief economist at Monument Securities.
Portugal's bailout is due to end on May 17, and attention
now turns to whether it will request a credit line to support
its post-bailout debt-market funding. The IMF said the country's
debt outlook "remains fragile" but made no mention of any need
for a precautionary loan.
Portugal will also be hoping its return to normal market
funding will help persuade ratings agencies to pull it out of
Fitch raised the outlook on Portugal's BB+ rating to
positive from negative at the beginning of last month, raising
the chances that the country will be lifted the one notch it
needs to regain investment grade status.
Moody's and Standard and Poor's, which rate Portugal three
and two notches below investment grade respectively, are
scheduled to review the country on May 9.
"I do believe we have turned the corner in terms of ratings.
We are now in an upgrade cycle rather than a downgrade cycle,"
said Peter Schaffrik, head of European rates and economics
research at RBC.
(Editing by Larry King)