Spanish, Portuguese bond rates rise to records

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Bond markets raised the tension on rates for debt issued by countries most at risk in the eurozone in early trading on Monday ahead of several critical bond issues this week.

The rate or yield on Spanish 10-year debt rose to 5.562% from 5.526% on Friday at the close, marking the highest rate since 2000.

The rate on Portuguese 10-year debt rose to 7.104% from the closing value on Friday, when it reached a record of 7.193% during trading.

Investors are concerned that when Spain and Portugal issue more debt this week, they will have to offer exceptionally high interest rates to attract lenders.

Fund managers will also focus on the extent to which the offers are oversubscribed or undersubscribed.

Usually, debt issued by top-flight countries is oversubscribed, and the rates demanded by lenders are relatively low, because top-flight government debt is considered one of the safest investments for savings funds, banks and insurance companies needing to hold long-term, low-risk debt.

On Wednesday Portugal intends to issue debt for three years and for nine years to raise 750-1.25 billion euros ($968-1.61 billion).

On Thursday, Spain is to issue five-year debt to raise 2.5 billion euros.

For several weeks, Spanish and Portuguese debt has been under heavy pressure on bond markets because these countries have big public deficits and weak prospects for growth.

Spanish Finance Minister Elena Salgado said Monday that Portugal had no need for a bailout, as it was undertaking structural reforms needed to reduce its deficit.

When investors perceive that risk attached to a government's debt has increased, they mark down the price of that debt or sell it, with the effect that the fixed interest for the life of the debt rises as a percentage of the new lower price.

This sets a benchmark of the interest rate which the government concerned must offer to attract lenders when it next issues debt.

There have been signs of tensions recently also on debt issued by Italy and Belgium, two other members of the eurozone. Rates of 6.0% or more may become prohibitive.

© 2011 AFP

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