Tuesday, January 24, 2012

Portugal in markets' crosshairs

Portugal remains vulnerable, with the bond market looking increasingly pressured this week.
WSJ: The cost of insuring Portugal's debt against default was at record highs Tuesday and its bond yields remained at elevated levels amid concerns that a possible second bailout for the country in 2013 would include a Greek-model haircut for private-sector bondholders.

Worries have mounted among experts that Portugal won't be able to return to markets for funding next year, forcing it to request a second bailout package
Even though the WSJ keeps discussing Portugal sovereign CDS, the real focus should be on the bonds, since in the wake of Greece sovereign CDS market is becoming dysfunctional. Portuguese 5-year bond spread to Germany is near the highs.

Portugal 5-year spread to Germany (Bloomberg)
It is important to track the 5-year more than the 10-year point because in a stressed credits the bigger yield/spread moves tend to happen in the shorter end of the curve. Portugal's yield curve is inverted - a typical behavior for distressed bonds. Note that the move in the "belly" of the curve has been more pronounced than the 10-year move.

Portugal inverted yield curve now and on 1/13/12 (Bloomberg)
Once Greece is "sorted out", Portugal will come into market's focus even more. The notion that they can return to markets for funding in 2013 seems increasingly unlikely. Therefore a high probability of a Greek-style mess for Portugal will be pressuring European markets going forward.
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