Portugal’s 10-year bond yield fell below zero for the first time on Thursday as expectations of further asset purchases by the European Central Bank continued to fuel an unstoppable recovery in eurozone debt.
Investors expect the ECB to expand its EUR 1.35 billion emergency bond purchase program at next month’s meeting to mitigate the economic impact of a second wave of coronavirus infections.
Minutes of the October meeting of the ECB, published on Thursday, confirmed policy makers’ concerns about a weakening outlook, saying that risks to the economy are “clearly downward”.
This prospect of further stimulus has spurred government bonds across the euro area, especially those that offer a considerable additional yield – or spread – over and above Germany’s highly negative-interest debt.
There is no point in fighting this move. . . This debt will disappear in the ECB’s coffers for a long time
The yield on the 10-year Portuguese benchmark bond fell slightly into negative territory on Thursday, according to data from Tradeweb, which means investors are now actually ready to pay Lisbon for a decade to borrow.
“There is no point in combating this move,” said Ludovic Colin, fund manager at Vontobel Asset Management, which holds Portuguese government bonds. “The market assumes that this debt will disappear from the ECB’s coffers for a long time to come.”
The Portuguese economy was hit hard by the Covid crisis. Fitch expects production to shrink by 8.8 percent in 2020. Coupled with the additional government bonds needed to fund the pandemic response, this will push Portugal’s national debt to 136 percent.The rating agency, which was below just Greece and Italy in the eurozone by the end of the year, last week confirmed the triple- Lisbon B credit rating.
Even so, investors were increasingly willing to ignore rising debt ratios in the euro area and beyond, as they were confident that central banks will absorb some or even all of the additional debt supply in the market while keeping interest rates at lows will.
For Portugal, joining the Negative Yield Club has marked a remarkable turnaround since its international rescue in 2011 at the height of the eurozone debt crisis. Among the larger markets in the currency bloc, only Spain, Italy and Greece offer investors positive returns over a 10 year period.
The recent drop in yields is also the latest sign that the heavily indebted economies of southern Europe are removing the stigma they suffered a decade ago when investors speculated on the eurozone collapse by selling their bonds.
“Investors are not dividing the euro zone into core and periphery as they did a few years ago,” said Pooja Kumra, interest rate strategist at TD Securities. Compared to larger economies such as Italy and Spain, Portugal has also benefited from its relatively low funding needs, as 40 percent of its debt is still in the hands of official creditors such as the IMF. This debt, a legacy of the bailout, is largely long-term and at very low interest rates.