Portuguese bond yield falls to 3.58%

Portugal's chances of exiting its three-year bailout rose after yields on its 10-year government debt fell sharply to an eight-year low of 3.58% at a bond auction.

Investor interest in the 750m euro (£617m) bond auction was such that it was three times over-subscribed.

The yield on 10-year bonds stood at 5.1% in February.

It suggests the country would enjoy investor support when it exits its international rescue programme.

The auction was widely seen as a test of the financial markets given its relatively small size and comes two weeks after a similar sale by Greece of 3bn euros of 5-year bonds.

Portugal was the third European country to ask for help, after Greece and Ireland, when its banks became engulfed in the eurozone debt crisis in March 2011.

It was forced to ask for a 78bn euro bailout after investors became reluctant to lend it money, pushing the country to the brink of brankruptcy.

As part of the bailout terms agreed with the EU, European Central Bank (ECB) and International Monetary Fund (IMF) - the so-called troika - Portugal instigated a series of unpopular austerity measures.

The effect has been its debt has come down from 10.1% of annual GDP in 2010 to 4.9% last year.

With Portugal's bailout programme due to end on 17 May, the bond sale will be seen as a key test of the country's ability to raise money on the financial markets on its own.

Portuguese Prime Minister Pedro Passos Coelho said the auction "gives us a lot of confidence for the future".

The government will decide on 5 May if it will ask its European partners for a precautionary line of credit. But most analysts believe Portugal will follow Ireland in exiting the bailout programme without need of further assistance.

Filipe Silva, debt manager of Portuguese financial group Banco Carregosa, said: "The risk perception with Portugal keeps going down. It is now proven that Portugal can finance itself in the tough and rough normal market without support from banks."

Lefteris Farmakis, a rates strategist at investment bank Nomura, added: "The more money they can raise at very low interest rates, the more it gives them an incentive to go for a clean exit."

Ireland held its first post bailout auction last month with a yield of 2.96%. Portugal's debt yields are at about the same level as Irish bond yields were in November, a month before Ireland exited the bailout programme.

Analysts also suggested the yield on Portuguese sovereign debt would fall further in expectation that credit agencies begin lifting Portugal's credit rating later this year.