Relief as Lisbon's bonds attract strong demand

Europe avoided an escalation in its sovereign debt woes last night after the year's first bond sale by one of the Continent's most indebted economies was judged a success.

Portugal managed to attract strong demand for its benchmark 10-year bonds, so much so that despite the country being seen as a candidate for a bailout, Lisbon's borrowing costs eased to 6.7 per cent, down from 6.8 per cent at its last bond sale in November, and well below the 7 per cent threshold analysts deem unsustainable. Anything higher than 7 per cent, it was feared, would heighten the need for a bailout.

In all, Portugal sold €1.25bn (£1bn) of five- and 10-year bonds. Borrowing costs for the five-year bonds rose from 4.0 per cent to 5.4 per cent but, in another positive sign, both the five- and 10-year auctions were oversubscribed.

Some 80 per cent of the debt was snapped up by overseas investors, according to the Portuguese finance minister, Fernando Teixeira dos Santos. "We consider [the] bond auction a success," he said.

Though positive, analysts said the European Central Bank (ECB) is believed to have stepped in to buy government bonds in recent days, thus softening the ground ahead of Portugal's sale and the Spanish and Italian bond auctions this morning. "We won't know this until next week, when the ECB publishes its bond purchase figures, but it is likely that the bank was active in the market in recent days," Forex.com's Kathleen Brooks said.

Moreover, Portugal needs to return to the markets in the near future. "While a moderation in bond yields may postpone Portugal from requiring a bailout in the short term, investor sentiment could dip prior to Portugal's auction of long-term debt in early February," Ms Brooks said.

Markets also kept an eye on news on the EU finance ministers' meeting next week, where the agenda is likely to feature the European Financial Stability Facility (EFSF), the rescue fund put in place after the Greek bailout.

Speaking in Brussels, the European Commission's President, Jose Manuel Barroso, said the scope of the fund's activities should be "widened", although the idea was played down by spokesmen for both France and Germany.

Separately, an internal commission report suggested that the European Stability Mechanism, which is meant to replace the EFSF in 2013, could be funded by a one-off European bank tax that could raise about €50bn.