December 15, 2010 / 1:23 PM / 7 years ago

UPDATE 2-Portugal debt auction yield jumps less than expected

 * Yield climbs to 3.403 pct vs 1.818 pct on Nov. 3
 * Below secondary market level, demand seen strong
 * Sells all 500 mln euros on offer 
 (Adds economist, government meeting)
 By Andrei Khalip
 LISBON, Dec 15 (Reuters) - Portugal's three-month borrowing
costs nearly doubled at its last debt auction of the year,
reflecting persistent investor concerns about the debt-ridden
country, though the rise was smaller than traders had expected.
 While the yield of 3.403 percent marked a euro lifetime high
and a huge leap from 1.818 percent at the previous auction on
Nov. 3, it came in below secondary market rates of around 3.8
percent on the same maturity PTEGE0011=TWEB.
 Traders had been expecting a yield of 3.5-3.8 percent.
 "This is not that bad if you look at the secondary market
yields. Obviously it is relatively weak, but at least it is not
going to leave the market worried again about funding," said
Orlando Green, debt strategist at Credit Agricole in London.
 "I think the main concern though is that the market will be
tougher next year. We are holding on to see the sentiment in
January," he added.
 Portugal sold all 500 million euros ($670.8 million) worth
of March 2011 T-bills on offer, and demand -- relatively strong
for the year-end pre-holiday season -- outstripped supply by 1.9
times, slightly lower than 2.2 times at the previous auction.
 Portugal's borrowing costs have spiked this year on investor
concerns over its public finances, and more recently, over the
possibility that it may follow Ireland and Greece in seeking
outside help to manage its debt.
 Most analysts said the auction did not raise the pressure on
Portugal to consider the option of a bailout, but neither did it
ease such concerns.
 "It was an expected yield rise, so I think it does not put
more pressure on Portugal to ask for assistance. But it remains
a fairly high yield and if it remains at these levels it will
force the government to cut spending further," said Joao Sousa,
an economist at BPI bank in Lisbon.
 The cost of short-term money has risen even as the European
Central Bank has moved to keep a lid on benchmark 10-year debt
yields in the past two weeks. 
 The premium investors demand to hold Portuguese
10-year-bonds rather than safer German Bunds rose about 5 basis
points on Wednesday afternoon to 358 bps from Tuesday's
settlement levels.
 The government has promised to Brussels it will slash the
budget deficit to 4.6 percent of gross domestic product next
year from this year's estimated 7.3 percent, and it has
introduced painful austerity measures such as a 5 percent cut in
civil servants' wages, as well as tax hikes in the 2011 budget.
 European Union Monetary Affairs Commissioner Olli Rehn told
the European Parliament on Wednesday that Portugal and its
bigger neighbour Spain, which has also been viewed with
nervousness by investors, were taking very convincing fiscal
consolidation measures.
 The cabinet, which was in a weekly meeting on Wednesday, is
also expected to announce this week a range of measures to help
secure economic growth and boost competitiveness. These will
include measures for the labour market and steps to reduce red
tape and bolster exports. 
 The government expects the economy to grow at least 1.3
percent this year on the back of rising exports after a 2.6
percent contraction in 2009. 
 Next year, it hopes to eke out a 0.2 percent expansion as it
expects strong exports to outweigh the impact on domestic demand
of painful austerity measures. 
 But many economists expect the country to slide into a new
recession, which would make the task of meeting the deficit
target much tougher to reach.
 Portugal has now completed its debt issuance programme for
2010. Its next bond redemption is not due until April, when it
has to repay 4.5 billion euros. In total, Lisbon has to repay
9.5 billion euros in bonds next year.
 According to the Portuguese 2011 budget, next year's net
financing needs are 10.75 billion euros.
(Additional reporting by Shrikesh Laxmidas and Filipa Lima;
Editing by Hugh Lawson)

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