Portuguese debt had the best performance among European bonds, which the German bank considers "justified". For 2020, it sees "greater convergence" with Spain and more repayments to the troika.
In 2019, the Portuguese public debt had the best performance among Eurozone bonds, thanks to the monetary policy of the European Central Bank (ECB) and the political stability in the country. Yields sank to historic lows and moved closer to Spanish yields. For 2020, Commerzbank sees less room for surprises in the European debt, but anticipates greater convergence between Portugal and Spain.
“Portugal has caught Spain both on the debt spread and in economic terms,” Commerzbank says in its outlook for next year. “As Portuguese Treasury bonds benefited from the net purchases of [ECB’s] assets and the political premium due to the unchallenged Government of [António] Costa, the strong performance in 2019 seems justified to us (in risk-adjusted terms, Portuguese Treasury bonds had the best performance in the whole universe of European bonds this year)”.
Rating improvements (associated with the debt and deficit reduction), together with the ECB’s acquisition programme (in which the central bank bought, between January and November, 3,827 million euros of Portuguese securities) and the international environment have been the main reasons for the sharp fall in interest rates on Portuguese debt this year.
Portugal had the best risk-adjusted performance in 2019
In January, benchmark bonds, i.e., ten-year bonds traded with a yield close to 1.8%, having sunk to an all-time low of 0.06% in August. In the following month, the difference between the interest rates on Portugal’s and Spain’s debts disappeared for the first time since the crisis, and investors began to ask for the same rate on both countries’ bonds.
“Among the countries on the periphery of the euro, we aim for greater convergence between Spain and Portugal, compared to Belgium, as macroeconomic indicators align. Portuguese government bonds should continue to be around parity with Spanish bonds,” Commerzbank points out.
Investors outside the Eurozone sell Portuguese securities
The sharp drop in European yields has led to 17 trillion euros in bonds with even negative interest rates, thanks to strong demand. “Flows will be another key factor in the behaviour of spreads next year. International investors have been driving this year’s aggressive narrowing, with net purchases by foreign investors reaching their highest value in more than five years,” explains the German bank.
Data compiled by Commerzbank indicate that, in the case of Portugal, investors outside the Eurozone have sold debt, while those inside the bloc have strengthened their positions. Part of this amount relates to the central bank’s purchases now led by Christine Lagarde, which should remain in progress next year, despite the attempt to exit the quantitative easing (QE) programme carried out this year.
More Portuguese debt repayments and exchanges in 2020
The bank anticipates that there will be 100 billion euros of eligible debt per month for the ECB’s programme, resulting in the purchase of 60 billion euros. “Putting stable supply in the perspective of QE reveals a very favourable demand/supply pattern in 2020”, he says.
At the supranational level, the bank’s research team expects that the European Stability Mechanism and the European Financial Stabilisation Fund will have a “slight slip” in the difference between the debt issued and the one that reaches maturity (to 27.5 billion of 30 billion) “as a result of the profile of repayments given that the net offer should remain stable”.
Among the debts that may be partially paid is that of Portugal. After paying off the entire loan from the International Monetary Fund, the Treasury and Public Debt Management Agency (IGCP) paid the first early repayment of two billion euros to European troika creditors in October. The strategy is expected to continue next year.
“The smoothing of the debt profile will be the focus of IGCP next year. Alongside the ongoing repayments to the EFSF, we are aiming for a higher level of debt buybacks to cope with the significant repayment curve in 2021 and 2022″, Commerzbank over Portugal added.