Spiralling oil prices pressure Portuguese bond yields

The ongoing war in Iran prosecuted by the United States and Israel, and now drawing in Yemen with the threat of closing off another second vital straight – ‘The Gate of Tears’ – into the Red Sea, is threatening to drive up the costs for Portugal of managing its borrowing.

The Portuguese State, like virtually all countries worldwide, services its annual spending needs by borrowing money on the international money markets and in return issues redeemable sovereign bonds which offer the lenders (international investors and pension funds) interest or yields on that borrowing.

However, in the US and Euro Zone investors are now asking for a larger yield or interest payback to cover the risks of State borrowing because of the repercussions of the war on the cost of fuel, distribution – impacting food supplies – and the threat of inflation overall.

Interest rates on 10-year bonds in the UK have already risen to 5% (7% being widely seen as unsustainable for any country to pay) and Portugal could follow suit.

Indeed, the spectre of increasing inflation and the corresponding response from the European Central Bank (ECB) is causing the increases seen on the sovereign bonds market with Portugal seeing its risk premium increase compared to Germany.

“What has been happening to Portugal has also happened to other countries in Southern Europe and even to sovereign bonds considered ‘core’.

Italy and Greece are the most affected, France, Portugal and Spain relatively intermediate, and Austria and the Netherlands only slightly,” explained Vasco Teles, manager of European and global fixed-rate funds at GNB Gestão de Ativos in statements to the business daily Negócios, over the increase in the “spread” between Portugal and Germany.

The difference between the yield on 10-year Portuguese bonds and that of German Bunds with the same maturity – an important risk indicator for debt investors – has widened by 15 basis points compared to the pre-war period, reaching over 50 basis points.

Currently, Portugal’s interest rate on 10-year bonds stands at 3.561%, compared to 3.095% in Germany. In Spain it is at 3.630%, in Italy at 4.050%, and in Greece at 3.984%. The French yield now stands at 3.833%.

Source: Negócios; Credits: Gary Walker-Jones at Unsplash