Portuguese government bonds took centre-stage today (Wednesday), with spreads taking a hit amid fears the government will break up, a turn of events that bankers said contributes to making new issuance for the rest of this week appear unlikely.

Paolo Portas

Portuguese government bonds are getting “smashed”, in the words of a syndicate official, because of fears that the country’s government is on the brink of collapse. Yields on 10 year PGBs approached 8% at one point this morning after rising some 100bp today on top of a 50bp jump yesterday (Tuesday).

The widening comes after Portugal’s finance minister, Vitor Gaspar, quit on Monday and the head of the junior partner in the governing coalition, foreign minister Paolo Portas, tendered his resignation yesterday evening. Local media are reporting that other ministers are in line to do the same, as the personnel changes trigger questions about whether the governing coalition can survive.

A syndicate official said that Portuguese covered bond spreads were around 20bp wider today, with Spanish covered bond spreads also getting caught up as the Portuguese developments unearth questions about the sustainability of austerity in the periphery. Cédulas spreads are around 5bp wider today, he said, while Italian covered bond spreads are a bit more stable, moving out “maybe only a couple of basis points”.

The pressure on Portugal, combined with euro-zone and UK central bank meetings tomorrow (Thursday) and US non-farm payrolls on Friday, and the related uncertainty about the direction of rates, means that no issuer is likely to want to pull the trigger on a new deal, he said.

RBS analysts said that their traders have seen “plenty of offers in Portuguese covereds from investors eager to leave the market”, but that they think Portuguese covered bonds will be able to outperform their country’s sovereign bonds.

Another syndicate official said that Portuguese developments mean today is no day for launching new issues.

“The market has blown up today,” he said. “You certainly wouldn’t be doing a trade today.”

Issuers in the pipeline – either officially or rumoured – include Caffil, the successor to Dexia Municipal Agency, and UniCredit Bank Austria with a possible debut mortgage benchmark.