(Updates prices, adds comments)
By John Geddie and Emelia Sithole-Matarise
LONDON, April 22 (Reuters) - Portuguese debt yields fell back towards eight-year lows on Tuesday as Lisbon prepared to auction bonds this week, the first auction in three years.
Wednesday’s 750 million-euro ($1.04 billion) sale of 10-year bonds, which follows 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.
“Just as we saw last week with Greece, these bonds are just going to be snapped up. Portgual has had a great run as it is and this auction is the next step. It signifies that it can stand on its own feet,” said Alan McQuaid, chief economist at Merrion Stockbrokers.
A strong auction should pull down borrowing costs in Portugal and the rest of the euro zone periphery, analysts said.
Portuguese 10-year bond yields fell 3 basis point to 3.72 percent early on Tuesday, not far from 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 selling pressure in thin post-Easter holiday trade.
German 10-year yields - the euro zone benchmark - was 3 bps higher at 1.54 percent. The Greek equivalents, meanwhile, were the best performers, dropping 10 bps 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.
ECB executive board member Benoit Coeure said there was further margin to reduce the main interest rate below 0.25 percent and reiterated that QE remained a policy option.
“Generally with the ECB in the background and the possibility of QE or some form of monetary stimulus, that’s going to contain any rise in euro zone bond yields,” McQuaid said.
The latest health check of the euro zone’s manufacturing and services sector - April flash PMIs released on Wednesday - will be 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 junk territory.
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. ($1 = 0.7244 Euros)