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US’s Lew flies to Portugal as periphery parties

Thursday, 9 Jan 2014 | 12:11 PM ET
'Very pleased' with auction: Portugal Treasury
Thursday, 9 Jan 2014 | 11:00 AM ET
Joao Moreira Rato, chairman of the Portuguese Treasury and Public Debt Management Agency, comments on Portugal's latest bond auction which was "quite oversubscribed", and Portugal's first issuance of new debt in eight months.

U.S. Treasury Secretary Jack Lew ended his European tour on Thursday in Portugal, which launched a five-year bond as it sought to demonstrate its ability to finance itself affordably in the public markets.

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Joao Moreira Rato, the chairman of the Portuguese public debt agency, told CNBC he was very pleased with the auction's success, which was Portugal's first sale of new debt in eight months and took advantage of benign market conditions for debt from euro zone peripheral countries. These include Portugal, Ireland, Italy, Greece, Spain and Cyprus — the countries that were hit hardest by the crisis.

"The book was quite oversubscribed," Rato said on Thursday.

"We did the transaction on the back of a lot of positive investor feedback and the very constructive tone in the euro market and the fact that there was minimal competing supply... We hope and anticipate, in some sense, a good performance for this deal."

Reuters reported that Portugal raised 3.25 billion euros ($4.41 billion) through the auction, topping expectations of 2.00-2.50 billion euros. The bonds were priced to yield 4.75 percent and will mature by June 14, 2019.

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Lisbon, Portugal
Travel Ink | Gallo Images | Getty Images
Lisbon, Portugal

Peripheral bonds have rallied strongly since the start of the year, boosted by a fledgling economy recovery and expectations of continued easy monetary policy from the European Central Bank, or even further loosening. Greek and Portuguese government bonds are the top performers in their class year-to-date, returning 3.3 percent and 2.5 percent respectively, according to Bank of America Merrill Lynch.

In addition, Tuesday's successful auction by Ireland — another country looking to prove it can cope without a multi-billion international bailout program — has likely prompted Portugal to try its own luck in tapping the market. Ireland's 10-year bond issue was oversubscribed and yields tightened in the secondary market to 3.34 percent immediately after the auction, down from 3.40 percent.

(CNBC Explains: Bond yields and prices)

Periphery bond rally set to continue?
Moyeen Islam, associate director at Barclays Capital, says he is "positive" on European periphery bonds.

Portugal's three-year 78 billion euro loan program is due to end mid-2014, so a successful auction was crucial to proving investors' faith in the country and ensuring it will not need to request a second bailout.

"Even though it's still far too premature to speculate on Portugal's ability to stand on its own two feet once its three-year bailout program runs its course in June, one can already sense how eager the Passos Coelho government is to prove it can fund itself in the markets at affordable rates," said Nicholas Spiro of Spiro Sovereign Strategy in a research note on Thursday.

"Having looked on with envy at Ireland's 'clean exit' from its own rescue program in December, Portugal's government is desperately seeking a dignified exit of its own. With the exception of Greece's government, Portugal's is under the most political pressure to restore at least some of its economic sovereignty. The Portuguese Treasury's plans to issue new 5-year paper are part of a determined bid on the part of Lisbon to build up a cash cushion to at least give it some financial leverage in its post-bailout negotiations with its creditors," he added.

Rato told CNBC that Portugal now intends to return to its pre-crisis style of financing through bond auctions and syndicated deals.

"Our plan is to be regularly in the market. So we intend to go back to a program that is very similar to what we had before. In part, that is a combination of auctions and syndicated deals... Our mandate is to return to the type of financing we did in the past," he said.

However, Portugal is viewed as a far weaker credit than Ireland and its debt is still rated "junk" by Moody's Investors Service, which will reassess the country on Friday. Portuguese 10-year debt still yields around 2 percent more than its Irish equivalent, despite the sharp rise in peripheral euro zone bonds since the nadir of early 2012.

"The reality is that Portugal is not Ireland — and even Ireland will struggle to stand on its own two feet," said Spiro.

"Ireland can just about get away without a safety net, but Portugal almost certainly can't. Yet by deciding against applying for a credit line, Dublin has made things even more politically difficult for Lisbon. There's now even more stigma attached to a post-bailout precautionary program."

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Modest spread tightening in periphery bonds
Michael Mewes, head of the fixed income group in Frankfurt at JP Morgan Asset Management, says there is an opportunity for "very modest" spread tightening in the European periphery bonds.

However, recent data have suggested improvement in Portugal's economy. On Wednesday, Portuguese retail sales were reported to have increased by 3.5 percent in November year-on-year, while unemployment declined.

Lew will give a joint press statement with Portuguese Finance Minister Maria Luis Albuquerque at 12:45 p.m. ET on Thursday, which will be followed by meetings with the Portuguese prime minister and deputy prime minister. His visit is part of a three-day trip to Europe — his fourth since taking office in February — and has included Berlin and Paris.

(Read more: Lew heads in to Germany export storm)

So far during this visit, Lew has reiterated concerns about euro zone countries, including Germany, emphasizing fiscal austerity rather than promoting growth.

"We will continue to make the case… that short-term demand has to be part of the agenda," Lew told reporters at the Parisian Ministry of Economy and Finance on Tuesday.

"We have been, over the years, concerned about maintaining demand in Europe and around the world. We think it is important here in Europe, in the U.S. and in Asia. We look at a growth agenda and it has to be rooted in investment and demand."

(Read more: US's Lew calls for European 'growth agenda')

—By CNBC's Katy Barnato. Follow her on Twitter: @KatyBarnato

Contact Europe: Economy

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