Portugal sails through 10-year bond issue

Portugal took a big step towards emerging from its bailout and borrowing normally to finance its budget, with a successful 10-year bond issue on Tuesday.

The debt management agency said it raised 3.0 billion euros ($4.1 billion) amid strong demand of 9.5 billion for an issue of 10-year bonds in a key test of whether the eurozone country can exit cleanly its EU-IMF bailout in May.

"The strong demand for Portuguese debt is a strong positive signal for the country," said Filipe Silva, analyst at Banco Carregosa.

"And for the investors, the yield is also rather attractive," he said.

The interest paid to attract the money came in at 5.112 percent, in line with the yield indicated by trading of existing bonds on the secondary market.

By May, the country needs to be able to re-finance itself normally on the sovereign debt market, thereby emerging from its bailout programme of 78 billion euros ($106 billion).

That was set up by the International Monetary Fund and European Union to avoid bankruptcy in 2011, but was conditional on radical structural reforms to correct the public deficit and ramp up competitiveness.

The latest data on the trade balance indicate that reforms are enabling Portugal to engineer an export-led recovery.

The renewed willingness of international investors, principally investment funds, to lend to Portugal at affordable interest rates is evidence that reforms put in place have won back confidence.

"It is a very beautiful order book," said a banking source.

"Portugal is in the process of showing that it can re-finance itself on the markets without any difficulty," added the source.

During its previous auction of 10-year bonds in May 2013, Portugal raised 3.0 billion euros at 5.669 percent with demand at over 10 billion euros.

And last month Portugal attracted demand for an issue of 5-year bonds, raising 3.25 billion euros at a rate of 4.657 percent.

The aim Tuesday was to seize on improving market sentiment which has seen the rate of return on its 10-year bonds fall below five percent on the secondary market, from above six percent at the beginning of the year.

The two bond issues this year, plus a bond swap carried out in December, mean that Portugal has nearly completed the amount of borrowing it needs for this year.

Portugal has not made a final decision as to whether or not it will seek a precautionary arrangement from the EU's ESM bailout fund when the current bailout ends.

Such a precautionary arrangement would allow the European Central Bank to step in and buy Portuguese bonds in case of a deterioration on the debt market, but on a conditional basis.

The Portuguese economy emerged from recession last year and unemployment has begun to fall from record levels as the government has worked to squeeze down the country's public deficit.

"The country has made lots of efforts which were welcomed by investors," the banking source said.