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Capital Markets

Bond yields: Portugal flies on two engines

The country is thumbing its nose at the doom-laden reports of hedge funds and letting its bond yields do the talking. Despite some unnerving economic data, the economy is firing on all cylinders and investors are keen to catch some of that momentum.

The only thing worse than being talked about, said Oscar Wilde, is not being talked about. If that’s true, the New York-based hedge fund Tortus Capital Management must have been disappointed by Lisbon’s response to a 64-page report it published in January, called Rehabilitating Portugal. 

It was a blitzkrieg of a document; a relentless barrage of bullet points arguing that the Portuguese status quo was unsustainable. It is an indication of the country’s new-found confidence, however, that the Tortus document was greeted in Portugal, according to one local economist, with supreme indifference.

Southern Europe has been here before. When John Taylor, of the now bankrupt FX Concepts, forecast a Spanish default and a euro break-up, Spain let its bond yields do the talking. More recently, Portugal has done the same, both in the primary and secondary markets

The sovereign’s 10-year spread to Bunds, which peaked at 1,441 basis points at the height of the crisis, had reached 218bp by the start of May. Its most recent syndicated benchmark, a €3 billion 10-year issue in February, generated demand of €9.5 billion at a re-offer spread of 320bp over swaps. Since then, spreads have continued to narrow.

“Even after the strong performance of the bonds in the secondary market, there has been no selling pressure,” says João Moreira Rato, CEO of Portugal’s debt management office (IGCP).

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