Fisher Investments Editorial Staff
Geopolitics, Market Risks, Developed Markets

Iberian-Induced Anxiety

By, 01/14/2011

Story Highlights:

  • This week saw successful bond auctions by Spain, Portugal, Italy, and Hungary.
  • Strong demand for Portuguese bonds may not be enough to comfort eurozone finance ministers.
  • If a bailout is needed, one is, of course, already available, with funds largely untapped.
  • Ongoing debt jitters could continue contributing to both euro and European stock market volatility—but an imminent and disorderly breakup of the EMU is extremely unlikely in the near term.

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This week's closely watched bond auctions by Europe's more fiscally frail fringe countries are complete. The results? Successful auctions by Spain, Portugal, Italy, and Hungary. Rates, though probably higher than these nations would like in more ideal circumstances, were still well within the range of expectations—and in some cases, a bit lower. It was a particularly good week for sovereign debt sales on the Iberian Peninsula, which has been under the microscope lately.  

Spain sold €3 billion of 5-year bonds on Thursday, in an auction that was 2.1 times oversubscribed. The average yield of the Spanish bonds sold on Thursday was 4.54%, up from 3.57% in November, but was markedly less than the 5% widely predicted. It's possible demand for the next round of Spanish auctions might not be as strong, but for now, Spanish funding for 2011 is on track. Italy's auction was also successful, despite rates at the higher end of the expected range. Regardless, the euro rallied slightly—perhaps cheered by another round of overall successful debt auctions.

But the nation currently under the brightest spotlight is Portugal. Wednesday, Portugal successfully sold €1.25 billion worth of bonds. Demand for Portugal's bonds was better than many expected—though, to be fair, yields were likely lower and demand higher thanks to European Central bank (ECB) purchases. Brisk demand, supported by the ECB, might not be enough to comfort eurozone finance ministers who are already reportedly discussing terms for a Portuguese bailout.

Portuguese officials insist they don't need a bailout. Then again, that's also what Irish and Greek officials said—initially. Perhaps Portugal won't need a bailout, and indeed, Portugal faces its greatest funding hurdles early in the year. It's certainly possible Portuguese officials are hoping to jawbone some optimism into their bond markets. Maybe that worked, and Wednesday's bond auction is evidence. However, if funding becomes an issue, a massive bailout is already available. Portugal need only raise the white flag.

Contagion handwringing is nothing new for investors—we saw plenty of it in 2010 and more is likely in store for 2011. Ongoing jitters could continue contributing to both euro and European stock market volatility. But an imminent and disorderly breakup of the EMU (the worst-case scenario) in our view remains extremely unlikely in the near term.

Renewed contagion fear isn't the only news coming out of Europe. Overshadowed but no less noteworthy is the fact Germany appears set to notch 3.6% growth in 2010—the fastest pace since reunification. And eurozone industrial production growth more than doubled estimates in November, likely signaling strong Q4 GDP growth on the Continent. Despite fears, contagion failed to materialize in 2010. And with bailouts, when needed and happening in an orderly fashion, contagion should be just as unlikely in 2011.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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