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Portugal sells €1.645bn in bonds at higher yields

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Portugal's borrowing costs have risen sharply but less than expected in a bond auction today and the hefty amount sold signals the country should be able to repay its maturing debt this month.

Portuguese bond yields have spiked to euro lifetime highs this week, pushed by a government collapse that has led to downgrades by credit rating agencies and mounting pressure for the it to ask for an international bailout.

The IGCP debt agency sold €1.645bn (£1.5bn) in June 2012 bonds, higher than the initially indicated offer of €1.5bn, with demand outstripping supply by 1.4 times.

The average yield on the June 2012 bond rose to 5.793 per cent from 3.159 per cent in the sale in July. The same maturity yielded over seven per cent bid in the secondary market earlier today. Analysts said the yield paid was slightly below the rate that Greece and Ireland were paying on European Union bail-out funds.

“Portugal has gained time with this auction,” said Filipe Silva, head of debt trading with Banco Carregosa. “The operation was a success in that the government was able to borrow at below the market rate. But it’s still paying too high a yield for short-term debt”.

Lisbon’s borrowing costs have soared to successive euro-era highs since the fall of the government on March 23, pushing the country to the brink of an international bail-out, which economists believe is now all but inevitable.

Aníbal Cavaco Silva, Portugal’s president, dissolved parliament on Thursday and called an early election on June 5 to resolve the political crisis triggered by the defeat of the minority government in a key vote on austerity measures.

The auction on Friday, not part of Portugal’s scheduled debt programme, was held in response to “specific demand”, according to the IGCP.

Analysts said the fact that more debt had been sold than envisaged indicated that the state had received firm offers to buy bonds at a yield below the market rate.

However, the interest rate was considerably higher than the 4.33 per cent paid in the last similar auction on March 16.

“The IGCP must have had one or two confirmed buyers, otherwise the auction would have been far too risky,” said a Lisbon trader.

“This auction showed that there still investors who believe Portugal will meet its debt payments,” said Mr Silva.

Portugal, which has to pay a total of €9.3bn in bond redemptions in April and June, has announced further plans to auction up to €7bn in debt over the next three months, all in Treasury bills with maturities of one year or less.

The next auction is planned for Wednesday. However, the IGCP said it would “actively follow market developments” and could adjust these plans.

“It wouldn’t make sense in the current conditions for Portugal to issue long-term debt,” Mr Silva said.

“The government sees this as a bad phase that will pass and it doesn’t want to pay such high yields for longer maturities”.

“I think yields will continue to rise,” he added. “The secondary market interest rate on one-year debt rose from 5.5 per cent to 6.3 per cent from Wednesday to Thursday and 80 basis points is a very big jump.”

Analysts believe the country has sufficient funds to meet the April repayment, but there are doubts over its capacity to pay the June redemption.

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