The yields on Portugal’s’ bonds are breaking records, above 7.5%. This can be “blamed” on the European Central Bank, that didn’t buy any bonds in the pat two weeks. Without the support of Jean-Claude Trichet, money becomes very expensive for Portugal. The high lending levels are unsustainable in the long run, and may force an intervention.
At the beginning of the year, there were talks about a bailout for Portugal – a Franco-German effort to convince Portugal to take the bailout in order to save Spain from the same fate.
But successful bond auctions, Chinese assistance (private auctions) and help from the ECB helped the yields come down and the pressure to lift from the small Iberian country. The next big event is the European summit in March. So, the only reason for the rise in yields is the absence of ECB bond buying.
Not only does the ECB’s money send the bonds down and the yields up, but it also sends a signal to other investors, that are ditching Portugal. In April, Portugal will have a big load of debt to pay back. The EU summit in March will therefore be a critical event.
The European debt issues are far from over – Greece and Ireland, which already received bailouts, are still troubled, and can still face a restructuring of debt. In the Greek case it could be the Brady plan, which offers bondholders a bet on getting paid or a safe exit with a haircut now. In the Irish case, senior bondholders might face a haircut as the new government in Ireland might take a different approach. The chances rose after a bank in Denmark made a haircut for senior bondholders.
Update: Well, the ECB woke up and returned to buying bonds – yields fell from a peak of 7.63% to 7.43% at the moment.
EUR/USD isn’t excited at the moment. While the pair drifted lower earlier, it’s still well within known ranges. Also Spanish bonds aren’t excited – The yields are rising also there, to 5.32%, but it’s still significantly lower from the 5.50%-5.60% levels already seen many times.
See events and technical levels in the EUR/USD Forecast.
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17 Comments
Thanks for your comment. Indeed, nothing significant has happened. The bond vigilantes sent the yields higher.
@Mike … ALL bond buyers are speculators!!!
Even other nations or banks are speculators. Bonds aren’t like currencies. Currency exchange is necessary for international commerce to take place. The buying of bonds is a 100% speculative activity no matter WHO (or what type of entity) is buying the bond.
So saying “this was a speculative move” is like looking at a town a tornadoe just went through and saying “it was the wind.”
Yes, exports are going up … thanks to a weaker euro. Yes, income from taxes went up 15%.
The issue is that Portugal’s public debt is unsustainably massive and their austerity measures make the joke of “deficit reductions” in the US look downright draconian.
It is Portugal’s unwillingness to even make it APPEAR like they are going to slow government spending, on top of the ECB halting purchases of Portugese bonds that is causing bond INVESTORS to drive up the price.
Has anyone ever noticed that someone is called an “investor” when they are doing something the government likes and a “speculator” when doing something they don’t like?
Investors ARE speculators. Bond buyers … ALL OF THEM … are investors/speculators.
The process of investing in bonds is speculation. PERIOD. China “speculates” regarding US bonds, believing in the “full faith and credit” of the US.
They are “speculating” again now that they are reducing their holdings and diversifying (albiet slowly) out of US bonds.
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@Danny
You do not need to do a so long comment to say what everyone knows.
Markets will do everything to broke Portugal. Period!!
EU and Euro must be “kaput”
Italy and Belgium are with a worst debt problem, Do you see Markets do anything to its Bonds? No
Portugal are smaller and easier to broke! That is what they thing! What can help them to win that battle must come from Internal Political affairs.
With Socrates as PM, he will not accept a international bailout.
Germany and France must protect EURO once for all.
First, Italy and Ireland are next to be hammered by the bond markets. Portugal is simply seeing their bonds hurt first because guess what … they’re the first to have a major bond auction following the ECB halting bond purchases to countries with weak austerity plans.
And mentioning Belgium in the same sentence with Portugal is a joke. Belgium is a minuscule economy.
Further, “he will not accept an international bailout.”
Yeah, that may be done for him much the way Greece was force fed their bailout.
And I wouldn’t be looking for a whole lot of help from Germany. All of this weakens the Euro which helps their exports.
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