Heading into Portugal’s big bond auction last Wednesday, I wrote that things were looking ominous for the PIIGS, as the Euro had broken down, and yields were breaking out. (And I was honored to have Minyanville feature the piece, too!)
Portugal’s bond auction went off smoothly, which set off the CNBC cheerleaders. But did anything happen worth cheering about?
The EU had reportedly been purchasing Portuguese debt for the days leading up to the auction – thus driving down yields to a bit more palatable level.
But let’s take a step back and look at the big picture. Yields on Portugal’s 10 year debt is still in a clear uptrend, with a textbook series of higher lows and higher highs. In fact, this most recent pullback presents a tempting potential entry to “go long” Portugal yields:
Source: Bloomberg
The Financial Times’ Ambrose Evans-Pritchard – who writes perhaps THE best column for keeping tabs on the ongoing EU saga – had a great postscript to Portugal’s auction:
Portugal held a successful auction of €1.25bn of debt today (January 12), including the sale of 10-year bonds at 6.72pc.
Well done.
However, there were many such successful auctions in the build-up to the Greek and Irish bail-outs. Such events are dramatic if they fail. Merely to survive an auction is less meaningful than some readers seem to think.
(I did not, by the way, predict that this auction would fail, given that China has promised to buy Iberian debt)
The ECB has been buying Portuguese debt heavily for two days. This has rammed down yields, but the ECB’s actions are subject to court challenge in Germany and the Bundesbank is openly opposed to such intervention. This policy cannot be used for long.
Precisely who bought the debt is an interesting question. It does not matter whether it is technically domestic or foreign, because foreign buyers can use proxies.
So no, I still view the dam as broken. Germany, Finland, and the Netherlands are pushing Portugal to take a rescue, for reasons that have little to do with Portugal.
Given the power politics going on in the EU, I do not see how this can be resisted for long.
Furthermore, I cannot see why people are so emotional about the specific question of a loan package.
There is nothing disgraceful about IMF help. That is what the Fund is there for.
The bond market appears to remain relatively unimpressed as well. Marc Faber mentioned today in Barron’s 2011 Roundtable that he expects the EU to continue to kick the sovereign debt can down the road for a long as it can. (For Faber’s full commentary, click here.)
Any way you slice it, there’s no easy way out for Europe.
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