Portugal joins the party

Peripheral eurozone debt has made a strong start to 2014 and the positive momentum continued today with Portugal tapping the capital markets for funds.

The Iberian sovereign sold €3.25bn in debt through re-opening a June 2014 bond, and orders in excess of €11bn indicated strong demand. The deal was priced at mid-swaps plus 330bps, yielding 4.65%.

Portugal's CDS spreads were just 2bps tighter today at 287bps, but they have rallied 66bps since the beginning of the year. The 1,500bps levels reached two years ago seem like a distant memory.

Ireland's successful bond issue earlier this week no doubt helped Portugal's cause. However, while Ireland has exited its troika bailout, Portugal is still subject to EU/IMF/ECB oversight. The latter country's bailout is due to end this summer, and today's debt sale is another step towards gaining full market access.

But the periphery is not homogeneous, and Portugal is not Ireland. It is by no means certain that Portugal will be able to go it alone when it leaves the tight embrace of the troika, as Ireland did in December last year. It might even need a second bailout, though the more likely scenario is that it will request a precautionary credit line from the European Stability Mechanism.

Austerity fatigue is becoming more acute in Portugal, and its debt burden still appears unsustainable. A private sector involvement (PSI) solution similar to that of Greece, or some other type of debt restructuring, cannot be ruled out further down the line. But the ECB remains a comforting presence in the background, and it will probably take an adverse political development to trigger a fresh bout of negative sentiment.

ECB President Mario Draghi's slightly dovish tone in today's press conference had little impact on spread direction. The Markit iTraxx Europe was 0.5bp wider at 71bps, while the Markit CDX.NA.IG was unchanged at 65bps. The focus will now turn to the US, where tomorrow's non-farm payrolls report will be closely watched.

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