Yields rise in Europe but fall on Portuguese debt

Short-term yields rose sharply in the latest European bond auctions, but fell on Portuguese debt due in 10 years after European Central Bank (ECB) intervention last week, according to data from Reuters.

Yields on Spanish debt due for repayment in five years rose from 3.6% at the final five-year auction in 2010 to 4.5% last Thursday.

The rates on Portuguese debt due in four years rose from 4.04% in late October to 5.39% last week. But the 10-year rates decreased from 6.8% to 6.71%, below what Portugal considers to be the danger-zone level of 7%. (article continues below)

The European Central Bank intervened in the markets last week to push Portuguese 10-year yields back to 7%. By the end of the week, they had fallen to 6.9%.

The rates are unlikely to satisfy investors that Portugal does not need a bail-out.

Portugal has had severe difficulties reducing its deficit, or supply of new debt, to match the reduction in demand.

The country has also admitted it is likely to fall back into recession next year, which would hit tax receipts and potentially increase Portugal’s reliance on borrowing.

However, investors took courage from the fact that Spain – and Italy, in a bond auction later the same day – borrowed the maximum amount without difficulties.

Despite rising inflation, European central banks such as the European Central Bank and the Bank of England declined to raise interest rates last week because deficit and spending cuts could reduce inflation later this year.