LISBON |
LISBON (Reuters) - Portugal is likely to pay record high premiums to place debt on Wednesday, but recent bond buying by the European Central Bank should avert a dramatic rise in yields to levels that prompt the country to seek a bailout.
The heavily-indebted Iberian country faces the bond markets for the first time in 2011 and needs to convince investors that it can keep financing itself without seeking EU financial aid or provoking a contagion that affects the much bigger economy of neighboring Spain.
Portugal is widely seen as the next euro zone weakling that will need a financial bailout following in the wake of Greece and Ireland.
Caution over the auction and a debt sale due on Thursday by Spain capped the euro against the dollar in Asian trade as investors waited to see what yields investors would demand to risk their capital.
The yield on Portugal's 10-year bond rose to a euro lifetime high of 7.3 percent in the secondary market on Friday. But it came come down to just below 7 percent at Tuesday's close, with traders citing ECB purchases.
On Wednesday, Portugal is to offer a total of between 750 million euros ($972.1 million) and 1.25 billion euros in four- and 10-year bonds.
"The market will take it down primarily because of what the ECB is doing. The ECB appears to be proactive enough and we've seen tightening in Portuguese yields so far this week," said Peter Chatwell, rate strategist at Credit Agricole in London.
Still, the borrowing costs should hit a new euro lifetime auction record of around 7 percent for the 10-year bond, up from 6.806 percent in the previous sale in November.
Bonds maturing in October 2014 yield 5.81 percent in the secondary market, up from 4.04 percent in the previous auction in October.
"Growing yields in the auctions all add to longer-term concerns about debt and liquidity, but it's not like it's going to be a make-or-break auction," said Chatwell.
BNP Paribas analyst Ioannis Sokos said he was not worried about demand at the auction or the yields after the ECB buying.
"I expect the auction to be already sold, with domestic demand enough to cover supply, but it doesn't mean that concerns will go away ... The next big test will be the syndication placement and peer pressure on Portugal to take aid," he said.
The country plans to launch a new bond worth at least 3 billion euros via a banking syndicate in the first quarter.
Traders said the ECB was active in the debt market on Tuesday buying Portuguese bonds as part of a plan to stabilize volatile peripheral debt markets.
Even if Portugal's debt auction is successful on Wednesday, markets will focus on how long the country can maintain such borrowing levels.
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