Portugal bond yield jumps

By Sergio Goncalves

LISBON (Reuters) - Portugal's two-year cost of borrowing hit the highest level since it joined the euro in a bond auction on Wednesday, and the government said yields were unsustainable in the long run without Europe-wide action.

Still, Treasury Secretary Carlos Pina said the country did not require an international bailout which the market sees as all but inevitable.

"These are rates that are not sustainable in the longer term, but they are still bearable at the moment, which reinforces the need for measures at the European level," Pina told Reuters in a telephone interview.

His comments came just two days before the first of this month's two European summits, where euro zone leaders will take the next cautious steps in their year-long effort to quell the region's debt crisis.

"We are conscious that the rates remain high and have been worsening, implying a need for an urgent European plan of measures to make the (European Financial Stability) fund more flexible," Pina said. These measures are likely to be discussed in detail at the European Union summit on March 24-25.

He said Portugal was doing what is needed to put its public finances in order and "does not need external help." The government aims to cut the budget deficit this year to 4.6 percent from gross domestic product after beating last year's target of 7.3 percent.

The yield on the September 2013 bond soared to 5.993 percent from 4.086 percent in an auction last September, also surpassing the 5.396 yield in the sale of a longer-dated October 2014 paper in January.

Still, the yield at the auction came at the lower end of secondary market rates and the IGCP debt agency sold all 1 billion euros ($1.39 billion) on offer, with demand outstripping supply by 1.6 times.

Yields on Portugal's benchmark 10-year bond had hit euro lifetime highs of 7.78 percent earlier on Wednesday, but were lower at 7.69 percent after the auction.

The premium investors demand to hold the benchmark bond rather than safer German Bunds also fell, to 439 basis points from a pre-auction high of 450 bps.

Portuguese bonds have been under heavy investor pressure on concerns the country will not be able to avoid following Greece and Ireland in requesting an international bailout.

Despite growing investor and peer pressure to request an EU/IMF bailout to ease its debt crisis, Portugal's government has dug in its heels in resisting such a move, saying it can sustain high bond yields for a while.

Filipe Silva, debt manager at Banco Carregosa in Porto said Portugal's yield curve was practically flat, with investors failing to determine the premium they should receive for each maturity.

"This happened in Greece and in Ireland before the bailouts," he said, adding though that "we are still not at the levels that require a bailout, but we are quickly approaching these levels."

Earlier on Wednesday, Portugal also held a reverse auction to buy back bonds maturing in April and June, repurchasing just 14 million euros worth of the June issue.

"Its shows that investors are not concerned that the state may not repay short-term maturities and are holding on to the bonds. But the issue is not the state's capacity to pay back the debt, but rather that the rates in the secondary market are too high and unsustainable in the long run," Carregosa's Silva said.

Portugal has around 4.25 billion euros in bonds maturing in April and around 4.9 billion in June.

(Reporting by Andrei Khalip, Shrikesh Laxmidas, London bonds team; writing by Andrei Khalip, editing by Patrick Graham/Toby Chopra)