Something to note about these Portuguese bond prices… (via Reuters)
(Other than that they dropped like nothing else on Monday)
The difference between the bid price and the ask price — a proxy of sorts for how liquid the bonds are — is enormous, whatever bond maturity you chose to look at. Portugal’s bond market has been headed toward this point for a long time; it’s now very thinly traded, while there are unlikely to be many foreign holders left this side of the country’s junk credit rating.
We suppose that’ll amplify any selling pressure. One theory that’s been advanced here is that Portuguese bond prices are starting to factor in debt restructuring in a cue from Greece, and the large (maybe senior) holdings of Portuguese debt by the ECB. In any case, if the debt was trading as haircut-able, Portuguese bonds are all over the place with ten-year bonds trading at 40 cents in the euro but two-year debt around 80 cents. Portugal doesn’t have to go back to market until May 2013, though its largest bailout tranche gets paid out in March 2012. And it’s clearly not managed to “encourage private investors to maintain their overall exposures on a voluntary basis” as its original bailout terms provided…
Though the other theory here is LTRO-related. It’s been mentioned before that banks will acquire sovereign debt to use as collateral which is relatively cheap to maintain on the balance sheet, despite margin calls and the expense of sovereign CDS.
As the following chart from Bank of America Merrill Lynch neatly expresses, the LTRO has helped short-term Spanish and Italian yields tick down. Not so much for Portugal, however:
Related links:
How to read CDS prices, featuring Portugal – FT Alphaville
The same crisis, again and again – FT Alphaville
Copyright The Financial Times Limited . All rights reserved. Please don't copy articles from FT.com and redistribute by email or post to the web.