* Portuguese CDS not far from levels seen in April 2011
* Shape of Portuguese yield curve indicates no panic
* Portugal's default risk 15 pct over next two years-Markit
By Ana Nicolaci da Costa
LONDON, Sept 18 Debt market prices suggest
investors expect Portugal will need another international
bailout but that it should avoid a near-term restructuring of
its debts that would impose losses on private investors.
Portuguese bonds have been under pressure since May, when
the U.S. Federal Reserve flagged its intention to curb
bond-buying. Domestic political troubles also took a toll.
The rise in borrowing costs has raised alarm bells, making
it increasingly unlikely that Portugal will manage to return to
the debt market as planned in the middle of next year.
The cost of insuring Portuguese bonds against default and
the premium they offer over German debt last week hit levels
seen in April 2011, when Portugal was forced to seek a bailout
of 78 billion euros (then $116 billion).
But while some credit default swaps (CDS) price in the
possibility of debt restructuring in the future, analysts say
bond prices suggest it is not seen as a near-term risk.
Indeed, long-dated Portuguese bonds still offer a yield
premium over two-year counterparts. Around the time Portugal
secured a bailout in 2011, the yield curve was inverted as
investors priced in the risk of imminent default.
"They expect Portugal will get another bailout but they see
a low probability that they will go into default or have to
undergo a debt restructuring," Alessandro Giansanti, senior
rates strategist at ING, said. "That's why you don't see the
curve becoming so flat or inverted like it was in 2011."
Greece secured a second bailout in February 2012 and the
terms of the deal imposed losses on private bondholders,
triggering payments of debt insurance contracts.
The cost of insuring five-year Portuguese bonds
against default hit 550 basis points on Friday
and the 10-year yield premium over Germany 551 bps after euro
zone finance ministers rejected Lisbon's proposal for softer
fiscal targets and postponed further debate until November.
On April 7, 2011, the day Portugal requested aid, they stood
at 548 bps and 547 bps respectively. Both have eased slightly
since Friday's highs.
However, the spread between 10- and 2-year Portuguese yields
stood at 148 bps, higher than the
lows hit in July when the government was close to collapse and
far off levels reached around the time of the May 2011 bailout.
In April and May of that year, the Portuguese yield curve
was inverted, with two-year bonds at one point yielding more
than 200 bps more than their 10-year counterparts.
Longer-dated bonds usually yield more than short-dated ones
to compensate investors for the risk of holding an asset for
longer. When short-dated yields overtake long-dated ones,
investors see an increased risk the sovereign will not pay them
back in the near term.
"The curve is more of a normal shape now than it was back in
2011," Gavan Nolan, an analyst at Markit, said. "What the market
is pricing in is (that) there is less of a near-term risk of the
CDS being triggered in the next couple of years or so. I think
the risks will be further down the line."
DEFAULT RISK MINIMAL
Sovereign CDS prices suggest only a 15 percent chance
Portugal will default over the next two years, compared with 14
percent at the end of June and this time last year, according to
Over the next five years, that risk increases to 37 percent,
up from 30 percent in late June and 32 percent a year ago.
Some analysts say the latest leg-up in Portuguese yields has
been primarily driven by concerns over U.S. stimulus, with
ten-year yields up nearly 200 basis points since the Fed in May
flagged it could curb bond-buying later this year.
"This is not a typical pricing of a default worry, it is
more in line with what is happening globally where the rates
environment has changed," said Salman Ahmed, global fixed income
strategist at Lombard Odier.
"This is not a liquidity crunch situation like it was in
2011. If the market was afraid that Portugal would run out of
money, you would have the curve shaped like in 2011 rather than
like it is right now. It's a clear-cut dislike of the long-term
credit compared to its peers, rather than anything to do with
the fact that there is imminent default coming."
Based on the International Swaps and Derivatives
Associations' fair value model, he said CDS spreads are showing
a yearly default probability of around 7.5 per year.