Portugal

Investors gave a firm thumbs up to a capital hole at Novo Banco identified by the European Central Bank this week, as the debt of the Banco Espírito Santo ‘good bank’ joined a wider rally in Portuguese bonds.

Investors are expressing optimism about the results of the European Central Bank’s stress test of Novo Banco — the so called good bank set up by regulators after the collapse of Portugal’s Banco Espírito Santo last year — despite the headlines that the regulator will require the bank to raise €1.4bn in capital.

The European Central Bank has identified a €1.4bn capital shortfall at Portugal's Novo Banco, but analysts say the results are positive for the bank’s bondholders.

Political risk appeared to be influencing investors’ decision making on Monday, as a trio of eurozone periphery sovereigns underperformed their peers in secondaries. But there was better news for Cyprus, which more than halved its one month borrowing costs at an auction.

Covered bonds issued this week from banks in Italy and Portugal were a roaring success from the sellers’ point of view. But none could have been done without the European Central Bank’s help.

Portugal’s secondary spread over its peers rose on Wednesday amid concerns that progress on its economic reforms could be slowed by a political stalemate — but it was still able to cut borrowing costs at a bill auction.

Spain’s nine month borrowing costs dropped to a euro-era low of minus 0.6bp at an auction on Tuesday, amid signs of investor pushback against negative yields.

Greece’s yields screamed lower on Monday despite reports that the country’s creditors are unhappy with its government’s reform efforts. Meanwhile, Cyprus could bring a bond after completing a roadshow last week.

Uncertainty over the make-up of the Portuguese government following an inconclusive election is playing havoc with the sovereign’s yields — but analysts warned it is not alone in suffering from potential political risk.

Portugal is underperforming its nearest peers in the eurozone periphery ahead of a debt auction later this week, amid tense talks to form a government for the country.

Italy has sparked a busy week for the eurozone periphery by cutting its borrowing costs at an auction of short term debt.

Novo Banco and Bank of Cyprus have both restructured their existing hard bullet covered bond programmes into conditional pass through programmes.