By MARK BROWN And EMESE BARTHA
Bond markets in weaker European countries were getting slammed Wednesday as investors continued to demand higher yields and one clearinghouse raised margin requirements for positions in Irish debt.
The premium that investors demand to hold Irish government bonds over German government debt hit a record high Wednesday, after LCH.Clearnet said that the margin required for Irish government bond trades will rise by 15% of net exposure.
Portugal paid the highest yields since the introduction of the euro to sell ?1.24 billion ($1.71 billion), nearly the maximum planned, of six- and 10-year debt at its last bond auction of the year, bringing some relief to the issuer but leaving markets largely on edge.
The re-emergence of sovereign-debt concerns among the euro zone's peripheral members come as concerns have been picking up over the past several days over possible efforts to make investors help pay for the cost of future euro-zone bailouts. The euro also has taken a hit, falling to below $1.37.
There are several reasons why investors are worried. But many analysts say buyers are worried that a permanent bailout-fund being crafted by European officials will be harsher on private-sector bond holders than previously believed.
"Everyone's running scared," said Huw Worthington, an analyst at Barclays Capital in London. "Until they get more clarity on how the proposed mechanism is actually going to work, investors aren't going to be relaxed about buying bonds."
In Irish debt, the yield spread between 10-year government bonds and the benchmark German bunds rose above 6 percentage points for the first time, according to Tradeweb. This followed LCH.Clearnet's increase in margin requirements, which will be reflected in a margin call Friday.
Higher margins?deposits that clearinghouse members put down and that can be used to fulfill their obligations if they fail to?would make it more expensive to trade Irish government bonds cleared via LCH.Clearnet. Clearinghouses sit in the middle of a transaction, assuming counterparty risk when two members trade.
"Sensible, non-market regulatory bodies are taking the [Irish] default risk seriously now," said Simon Penn, a market analyst at UBS.
"LCH.Clearnet will continue to monitor the situation closely and keep the parameters under close review," said Wednesday's notice to members of LCH.Clearnet's RepoClear service, which clears cash bond and repurchase agreement trades.
Still, analysts said the impact on sentiment toward Irish sovereign debt was likely more important than the technical impact of higher margins, because LCH.Clearnet had said last month that it was considering a margin increase, and also because a relatively small amount of Irish debt?Barclays Capital estimates less than ?4 billion ($5.51 billion)?is cleared through LCH.Clearnet.
The yield spread between Irish government bonds and bunds has widened steadily on worries about the Irish government's ability to pass its budget in December and on the impact of fiscal tightening on the Irish economy.
Ireland has also been caught up in the general weakness in peripheral euro-zone government debt, driven by uncertainty over how a permanent mechanism for confronting fiscal crises in the euro zone would work, and whether it would punish bondholders.
The yield on Irish 10-year bonds stood at 8.631.
Irish Finance Minister Brian Lenihan on Tuesday evening offered reassurance that Ireland wouldn't have to go the European Union for a bailout.
"We intend to return to the markets next year and we intend to fund ourselves. We have put our public finances on a sustainable basis in the last two years. We have done massive corrections in our debt and deficit and we will continue to do so," he told BBC's Newsnight.
Mr. Lenihan again stressed that the dramatic rise on Irish government bonds yields over the past week had been caused "entirely" by Germany's drive to ensure investors share the pain of any future euro-zone debt crises.
"We have made it a cardinal plank of our policy that we intend to pay our debts as a state. We will pay our way and we are determined to do that," he said.
Separately, Portugal's debt agency ventured to the primary market, where government bonds are first issued, as European leaders late last month agreed to create a permanent mechanism for dealing with a fiscal and debt crisis in a euro-zone country. Such a plan could involve investors in sharing potential risks.
This added to investors' existing fears over how Portugal and Ireland will embrace the twin challenge of bringing budget deficits under control when austerity measures slow down economic growth.
Portugal offered ?750 million to ?1.25 billion of the 4.2% October 2016 and 4.8% June 2020 bonds. Allocation tilted toward the longer bond, contrary to the expectations of some market watchers. They had suggested Portugal might want to sell more of the shorter bond, given that 10-year Portuguese yields have recently surged to near 7%.
Demand was decent, showing investors are willing to take on risk for high yields. The Portuguese debt agency sold ?556 million of the shorter bond at an average yield of 6.156%, compared with 4.371% at the previous auction Aug. 25. It also sold ?686 million of the 10-year bond at an average yield of 6.846%, compared with 6.242% at an auction Sept. 22. The bid-to-cover ratios came out at 2.3 and 2.1 respectively, versus 2.1 and 4.9 previously.
Despite Portugal's reasonable auction results, spreads for higher-yielding euro-zone sovereign borrowers widened, led by Ireland, whose 10-year yield spread over German bunds reached 6.49 percentage points. The Portuguese spread increased to 4.759 points, while the Greek spread was up to 9.15 percentage points. Spanish spreads traded up at 2.073 points, according to Thomson Reuters.
In a Portugal-specific angle timed ahead of the auction, Fitch Ratings on Monday downgraded two Portuguese banks, Banco Comercial Portuguese SA and Banco Espirito Santo SA, because the country's banks have been forced to borrow money from the European Central Bank, although the pace of borrowing has recently declined, according to recent data published on the Bank of Portugal's website.
Portugal's Finance Minister Fernando Teixeira dos Santos said he was satisfied with the auction results but emphasized that the high market rates shouldn't be ignored.
The auctions, "given the market circumstances, went well," he said on television station RTPN. "However, we cannot ignore that this issuance finished at a high interest rate, which reflects a situation of distress in the markets in the last few days."
Having finished borrowing for 2010, Portugal will now take a break and has avoided any near-term scenario of needing to turn to external help. Portuguese debt chief Alberto Soares told Dow Jones Newswires the country plans to remain on the markets. This contrasts with Ireland, which has canceled primary-market activity for the rest of the year.
"From the point of view of the Portuguese debt management agency, we're committed to maintaining our funding through the market," Mr. Soares said.
Jan von Gerich, senior analyst at Nordea in Helsinki, said that while more budget measures along with their successful implementation are needed for the country to regain market confidence, "still Portugal is not yet close to knocking on the door of the International Monetary Fund for emergency funding."
?Ainsley Thomson, Nick Andrews and Nicholas Winning contributed to this article.This entry passed through the Full-Text RSS service — if this is your content and you're reading it on someone else's site, please read our FAQ page at fivefilters.org/content-only/faq.php
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