Essential Business

Portugal’s public debt for sale at negative yields falls to €66Bn

 In News, Public debt, Public Financing

Portugal now has just €66.2Bn of public debt to trade at negative interest rates in the market, around 42% of the State’s total debt.

However, this amount had been greater: just six weeks ago it stood at €87.5Bn, and a year ago €115Bn (78% of Portugal’s total debt), in accordance with data supplied by Tradeweb to the online news source ECO.
In other words, the cost of Portugal’s public borrowing to finance the State is getting more expensive for Portugal and more lucrative for investors.
Public debt, issued by the IGCP headed by Cristina Casalinho (pictured) with various maturities has been trading at positive values in recent weeks (interest rates rose as share values fell): the interest on Portuguese treasuries at six, seven, and eight years maturities traded with positive interest rates by the end of 2021.
Since the ECB meeting on 16 December, 2021, interest rates have not stopped rising, and 2022 has seen a renewed increase in the interest rates offered on bonds, particularly after the US Fed’s more aggressive control of monetary policy to counter high inflation: investors will be able to capitalise on four Fed fund interest rate hikes stating in March.
The ECB has also been pressured to act to control inflation which is currently at its highest rate since the Euro was created.
However, the ECB has repeated the mantra that current inflation levels are temporary and will disappear in the second half of 2022. Moreover, the ECB is working towards an inflation target of 2% over two years and forecasts suggest that it may be able to keep interest rates as low as possible.
It is against this backdrop that government bonds have devalued, so then no longer have negative yields. (which is good for investors and bad for the Portuguese government which has to now pay more to service its debts)
With negative interest, investors were not encouraged to sell them, bur rather to hold onto them until the bonds matured.
On Wednesday, the yields associated with German 10-year bonds (the EU benchmark for investors) gave positive yields for the first time since May 2019.
This is not good news for Portugal. Interest rates on 10-year bonds have risen to 0.6% — a maximum since June 2020, but still a far cry from the unsustainably crippling 7% rate seen in 2011 for 10-year bonds when Portugal basically became bankrupt, and could no longer pay public sector wages.
Bonds with maturities of six, seven, and eight years which have had negative interest rates over the last few weeks, are currently trading at 0.052%, 0.185%, and 0,294% respectively.
Bonds with a maturity of five years or less continue to trade with negative interest rates. Analysts now think that interest rates on bonds have already hit the bottom, and from now on will rise: good news for investors, but bad news for the Portuguese treasury, but not dangerously so.


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