The Portuguese debt auction went without event yesterday. Portuguese debt was in demand which slightly eased concerns about European peripheral sovereign debt. Portugal sold €599m of bonds that mature in 2020 at a yield of 6.71%. This compares with 6.80 per cent in November last year and is below the 7% level that is considered to be unsustainable. EUR 650m of bonds due in 2014 were sold at a yield of 5.39%, up a great deal from 4.04% in October. This shows that bond markets are more concerned about Portugal’s ability to meet her short term commitments.
The currency markets gave a muted reaction to this, as the news was neither good nor bad. The Euro was expected to fall if the bonds were sold above 7%. As the 10 year notes were sold at 6.72%, this was not low enough to inspire confidence either. Hence the Euro stayed at about .83 to the Pound and 1.31 to the US Dollar. Portugal will be selling a further €20bn in bonds this year to finance its budget, and this tranche is expected to be marketed in the next few months.
“Markets are far from convinced that the crisis has begun, let alone ended,” said Alan Wilde, head of fixed-income and currency at Baring Asset Management in London.
“Temporarily, the ECB has steadied markets using some judicious buying of sovereigns with the widest spreads, and the successful Portuguese auctions have resulted in a lift for the euro,”
Attention will now turn to Thursday’s auction of Italian and Spanish debt, which is also expected to go without event. However debt will be sold at a premium. The extent of this will be closely watched. If investors are paying a large premium for these bonds then the Euro will again be under pressure. Spain is looking to raise EUR 3bn of five-year bonds, and Italy is auctioning EUR 6bn which will mature is 2015 and 2026.
Thursday will also be notable for the Euro because of the ECB interest rate decision and the following press conference. Currency traders pay close attention to the press conference because we get to find out exactly what policy makers are thinking and how they are interpreting economic data. This month policy makers will be pressed into their views about the present debt concerns. We will find out about the risks of contagion to other European economies, with Belgium under especially close scrutiny.
The Bank of England Monetary Policy Committee also meets today. The results of this are expected to be unchanged interest rates set at 0.5%. However with inflation stubbornly over the 3% mark and the private sector recovering from recession, the Monetary Policy Committee is under some pressure to consider incremental rises.
Wednesday also saw the release of some key economic data, including German GDP. This came in at the expected 3.6% for the last quarter, which is particularly strong. This shows the Germany is recovering strongly from the recent recession. Unfortunately the rest of Europe does not seem to be as competitive.
