By Neelabh Chaturvedi and Mark Brown Of DOW JONES NEWSWIRES
LONDON (Dow Jones)--When Portugal auctions up to EUR1.25 billion of bonds Wednesday, the most keenly eyed euro-zone government debt sale in months, the 7% yield barrier for the 10-year notes could be another flashpoint for the fiscally strained country.
Both Greece and Ireland last year were forced into accepting external support after being forced to pay investors a pricey interest rate of 7% or more on their 10-year bonds.
The 7% level isn't a mechanical trigger. But investors know that at some point debt costs become unsustainable and they may extrapolate the 7% trip wire that toppled Greece and Ireland to Portugal.
European policy makers should be equally aware of the 7% significance. Steady buying by the European Central Bank in recent sessions has helped arrest the sharp climb in Portuguese yields, with the benchmark 10-year bond currently yielding 6.881% after reach highs of 7.43% Friday, according to Tradeweb.
"Portuguese [10-year] yields above 7% do spell problems, and that's why the European Central Bank was buying [Portuguese] this week," said Mike Riddell, fixed-income fund manager at M&G in London.
"Back in April last year, Greek 10-year bonds rose from 7.3% in mid-April to above 10% two weeks later," he said. "There are support mechanisms in place now that weren't available then, but that experience can support the market perception that we are getting towards the point of no return."
Interest-rate strategists at Credit Agricole explained in a note to clients that the 7% level has acted as a support for 10-year Portuguese bonds in the past. Crossing it could force Portugal into the same dead-end as Greece and Ireland, even though the Lisbon government has vigorously resisted suggestions it needs international aid.
"A 7% yield for tomorrow's small reopening would not send the Portuguese economy spiraling into insolvency, but it may set investor expectations to expect higher yields in subsequent auctions, thus risking pushing the Portuguese debt pile closer to unsustainable levels," Credit Agricole strategists said.
A weak outcome on Wednesday could portend a bailout package similar to ones received by Greece and Ireland, something the Portuguese government says it is keen to avoid.
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