ITC – Portuguese supply

Portugal (Baa3/BBB/BBB) has seen its bonds do extremely well on a relative and absolute basis in 2019, helped by a strong credit story such that the spreads to Spain, which is currently rated 1-2 notches better (Baa1/A/A-), with much better market liquidity. Only above 10y do Portuguese bonds really trade cheaper.

Part of the reason for the expensiveness of PGBs is the supply story. Tomorrow, Portugal will sell ~€1bn and this will bring their PGB supply to ~€14.1bn so far this year, compared to an official funding target of €15.4bn.

Z-spreads (Portugal: pink, Spain: green)

Looking into the immediate future Portugal does not have a large funding need and so auctions could increasingly become a source of liquidity. However, it is important when looking at Portugal’s funding situation to realise that funding needs may be low but that IGCP has been/will be keen on repaying EU/IMF and undertaking exchange auctions to smooth maturity profiles.

Portugal would have finished its 2019 funding had it not decided to repay some €2bn of EFSF loans. The decline in funding next year relative to this year is partly linked to only 8bn of PGB redemptions in 2020, compared to 11bn in 2019 but also a projected small budget surplus. The table below is from the IGCP and we have highlighted the changes from 2019 to 2020. Note that from November, the ECB will begin buying PGBs via PSPP once again and will continue to reinvest any redeeming Portuguese bonds back into the PGB market (although next redemption is not until June 2020). The IMF loan has now been fully repaid but ~€50bn of EU debt remains (with 13y average maturity) and clearly extra funding could be used to repay this.

Additionally, Portugal runs a healthy bond exchange programme which might throw some extra longer term bonds into the market, but since exchange auctions and EFSF repayments are not funding NEEDS, IGCP can await favourable market conditions.

Medium term funding needs