Portugal still a domestic play
The Portuguese government bond market had a value of e27.5bn at the end of 1999, which represents less than 2% of the EU government bond market. Because of its small size, the market is not included in JP Morgan’s Global Bond Index (GBI).
Portugal is in the GBI Broad index along with fellow EU members, Finland and Ireland, and also New Zealand and South Africa but he only EU member to be excluded from the Global Indices is Austria. The Portuguese share of the broad is less than 0.5%, and only New Zealand bonds account for a smaller share.
Like several other smaller members of Euroland, euro-membership has given the Portuguese economy a huge boost, and GDP growth has been well above 3% per annum throughout the 1990s. The macro-economic situation is very healthy: a budget deficit of 1.8%; outstanding debt as a percentage of GDP just below 60%; and inflation, although slightly high at 2.5%, remarkably under control given the speed of economic growth and by no means the highest in the EU.
For many global bond investors the fact that the Portuguese market is so small and represents such a tiny fraction of the GBI Broad means that Portuguese bonds would be unlikely to feature in many global portfolios. With 10-year Portuguese governments yielding just 30 basis points more than Bunds, and less than 10bps over much bigger neighbour Spain, managers are simply disinclined to hold Portuguese assets, and that the relatively poor liquidity is a deterrent against short-term trading too.
The onset of EMU has had little impact on the asset allocation decisions of Portugal’s domestic bond investors. Antonio Nunes, fund manager at AF Investimentos in Lisbon, explains, “In our specific case, we are still holding our domestic government bonds, and we do not have any plans to switch out of them, especially with spreads to other governments (bonds) so narrow.
“I would imagine that EMU has enabled some of our competitors to switch in to say, Spanish or Italian bonds in the search for increased liquidity. As for newcomers to our government bond market, I do not believe there have been many even with the common currency.’
Whilst agreeing that there has been little change for investors in Portuguese bonds and that liquidity has not changed, there have been some changes on the sell-side, according to Joao Vasconcellos, head of fixed income sales at Banco Espirito Santo Investimentos.
He goes on, “The Public Debt Management Office, which is an autonomous institution responsible for the management of both the primary and secondary markets in Portuguese government bonds, has altered the way it issues bonds. In the past we used to have monthly auctions of various issues.
Today the auctions are no longer monthly, but tend to be for larger amounts of single issues. And now the auction is underwritten by syndicate and then placed around the world. It was a change for the good by the PDMO, and now the system is much more streamlined, and should be more attractive to more foreign investors,” he says.
Vasconcellos suggests that there has been a change in the type of investors buying Portuguese bonds. He says that there are now more end investors who buy and hold their bonds perhaps until maturity. Some investors are now viewing Portuguese government bonds in the same light as the German Pfandbrief.
In the past, a lot of the buyers and sellers were banks themselves who were involved more in arbitrage trading. Vasconcellos and his team are seeing increasing interest in corporate bonds, both Portuguese and foreign, and although the customer base in Portugal has yet to fully appreciate corporates, he sees it as just a matter of time. Caroline Hay