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Lisbon hails bond auction success

Stock markets rebound amid talk of expanding EU bailout fund

Portugal on Wednesday survived its first major market test of the year as the yield on the 10-year government bond fell at auction on strong demand.

The auction took place as EU commissioner for economic and monetary affairs, Olli Rehn, said moves are afoot to boost the size and scope of the European Union emergency fund, already tapped by Ireland and Greece. The stock markets reveled in the news with the Spanish blue-chip Ibex 35 climbing 5.42 percent led by the banks, while in Lisbon the benchmark PSI-20 rose 2.59 percent.

The rate Portugal offered at the 10-year auction was below the critical 7-percent level considered to be unsustainable, and also below the yield paid at the previous auction in November during the height of the Irish debt crisis.

The outcome smoothed the way for Spain, which is aiming to sell up to 3 billion euros in 10-year bonds in its first government debt auction of the year on Thursday.

The European Central Bank had also helped Portugal's cause ahead of the auctions by buying its debt in the secondary market and helping to push the yield on the benchmark 10-year bond back below 7 percent. Japan also helped buoy sentiment by announcing on Tuesday it planned to buy debt to be issued by the European Union to back Ireland's bailout.

"I think Portugal has passed this test, though of course the pressure is not off just yet. There was good volume sold, right at the top of the indicative amount," Reuters quoted Orlando Green, a debt strategist at Credit Agricole in London, as saying.

In remarks to Reuters, Portuguese Finance Minister Fernando Teixeira dos Santos called the auction a success, with 80 percent of the demand from overseas investors. Teixeira dos Santos said the government sees no need to change its strategy of tapping the markets for funding.

Prime Minister José Sócrates on Tuesday vigorously rejected the need for Portugal to follow Greece and Ireland in seeking funds from the European Financial Stability Facility (EFSF).

The Portuguese debt management agency IGCP said the average yield on the 10-year bond fell to 6.719 percent from 6.806 percent at the previous tender held in November.

The IGCP issued 599 million euros of the bonds, with demand from investors over three times the amount sold. The combined amount sold was just short of the upper limit on the Treasury's target range of 1.25 billion euros.

However, as a reminder of the market pressure that has been building up since the Greek crisis in May of last year, the IGCP was obliged to raise the average yield at the four-year bond tender to 5.396 percent from 4.041 percent in October. The debt agency issued 650 million eurosin the four-year maturity with demand 2.6 times the amount sold.

The jury, however, is still out on whether Portugal can avoid that fate. The government needs to sell some ?20 billion in debt this year, with April expected to be a key month.

"The auction result provided some relief, but it's no game changer," Bloomberg quoted David Schnautz, a fixed-income strategist at Commerzbank in London as saying. "Portugal is still paying penalty rates for their borrowing, and there is still pressure on the government and the risk that they might have to seek aid can't be excluded."

Rehn had words of encouragement for the Iberian country and its neighbor Spain when asked about the need for a rescue package.

"We are following the events in Portugal. Portugal has taken very bold fiscal measures in the context of this year's budget, and has announced substantial structural measures as well. Also the fiscal data of last year was quite positive."

"Portugal is on the right path now in terms of taking bold action on fiscal consolidation and pursuing structural reforms," Rehn said.

In the case of Spain, Rehn added: "Spain has taken very substantial fiscal measures, is putting forward very significant structural reforms, restructuring the banking sector, it is advancing its pension reform as well as the reform of the labor market. These are very convincing actions and I am sure that Spain can turn the corner with these measures."