Portugal only managed to sell EUR 750 million in bonds at yesterdays auction – at the bottom of its indicative range – and, like Ireland, was forced to pay much higher yields than its previous auctions. The Irish CDS spread reached its highest level since March 2009.
“It is becoming clear that Ireland and Portugal are perceived by investors as the most vulnerable to a Greece-style collapse in confidence.”
Credit underperformed equity yesterday in another session dominated by sovereigns. After the Irish government‘s bond auction on Tuesday – deemed a success at the time – Portugal followed up on Wednesday with its own debt sale.
Again, the consensus was that the auction was a strong one, with the sovereign achieving high bid-to cover ratios of 3.5 (2014 bond) and 4.9 (2020 bond).
But it only managed to sell EUR750 million – at the bottom of its indicative range – and, like Ireland, was forced to pay much higher yields than its previous auctions.
Portugal did see some modest tightening in its CDS spreads but this proved just as ephemeral as Ireland’s rally the day before.
Both countries were significantly wider by the close and Ireland hit a record wide of 465 basis points.
Greece continued to outperform and Spain’s spreads held up relatively well, according to the daily update from Markit Financial Information Service.
“It is becoming clear that Ireland and Portugal are perceived by investors as the most vulnerable to a Greece-style collapse in confidence,” vice president at Markit Credit Research, Gavan Nolan, writes.
Spilling Into The Banking Sector
The weakness of the sovereign has spilled over into the country’s banking sector.
“Perhaps in Ireland’s case the causality should be reversed. Either way, the banks’ spreads have hit their widest levels since March 2009,” Nolan points out.
Banks were underperforming across the European CDS market, with the Markit iTraxx Senior Financials index 8.5bp wider at 145.5bp.
It should be noted that liquidity does vary among banks.
Irish banks AIB and Bank of Ireland, for example, have Markit Liquidity Scores of 2 and 3 respectively.
Most of the banks in the core euro zone have scores of 1, indicating the highest liquidity.
Prepare For Impact
The markets were also digesting the implications of yesterday’s FOMC statement.
There was a notable change in language that suggests the FED is preparing the way for the next stage of quantitative easing, possibly as soon as November.
The statement made clear that the FED is aware of the risk of deflation, and is prepared to use unconventional measures to counter this.
This implies that if inflation is persistently below target in the months ahead then the FED will ease policy.
“Whether this tool will be effective in promoting growth is open to question,” Gavan Nolan notes.
The Bank of England MPC minutes Wednesday indicated that they are also looking at further stimulus measures, though they are not in the position to use dormant inflation as a rationale.
- Markit iTraxx Europe 114.5bp (+4.5), Markit iTraxx Crossover 520bp (+10.5)
- Markit iTraxx SovX Western Europe 162bp (+5)
- Markit iTraxx Senior Financials 145.5bp (+8.5)
- Sovereigns – Greece 800bp (-5), Spain 235bp (+1), Portugal 395bp (+30), Italy 198bp (+6), Ireland 465bp (+31), Belgium 143bp (0), Hungary 347bp (0)
- BP 195bp (+1)
- AIB 615bp (+58), Bank of Ireland 515bp (+86)
Related by The Swapper:
Select Your Language:
- Ireland Credit Risk Jumps to Record on Anglo Bondholder Concern (businessweek.com)
- Irish CDS Blow Out Again (blogs.wsj.com)
- 24 hours in the sovereign debt market (ftalphaville.ft.com)
- Ireland sells €1.5bn of bonds amid warnings of Greek-style crisis (guardian.co.uk)
- Bunds Rise on Issuance Cut; Irish Bonds Drop on Growth Outlook (businessweek.com)
- Bonds: Ireland and Portugal still struggling with cost of borrowing (guardian.co.uk)
- Bank Default Swaps Rise Most in Month on Bets for More Capital (businessweek.com)
- Ireland Auctions Less Than Maximum Amount Sought at Bill Sale (businessweek.com)
- Funding Test for European Banks (online.wsj.com)