Portugal bond swap to test investor appetite Portugal will test investor appetite on Tuesday in a bond swap seen as preparing the way for a full return to the debt market ahead of the country's planned exit from its €78bn bailout programme in June. The IGCP, Portugal's public debt agency, said on Monday it would exchange bonds falling due in June and October 2014 and October 2015 with debt maturing in October 2017 and June 2018. It is offering a yield of 4.677 per cent on the 2017 bond and 4.956 per cent on the 2018 debt. The amount outstanding on the three bonds being exchanged totals €27bn. Lisbon is expected to follow the swap with the issue of new bonds by early next year in an effort to make a full return to the market before its three-year rescue programme terminates in mid-2014. Fitch Ratings said Portugal should ideally issue new bonds at different maturities at least twice between now and the end of its bailout in June to show that it had regained full market access. "This is a good moment to tap the market," said Maria Luís Albuquerque, finance minister, adding that the swap would improve the country's debt profile. Portugal's 10-year borrowing costs have stabilised at just below 6 per cent in recent weeks after reaching a 2013 high of 7.56 per cent in July amid a political crisis that threatened to bring down the centre-right coalition government. Isabel Castelo Branco, Treasury secretary, said the government was "working actively" on a return to the bond market early next year and was registering "growing investor interest" for a new issue. Before the July crisis caused a surge in yields, Portugal had embarked on a similar path a year ago, following a €3.8bn bond swap in October 2012 with a €2.5bn issue of five-year bonds in January and a €3bn auction of 10-year debt in May, when 10-year borrowing costs dropped to a 2013 low of 5.19 per cent. Pedro Passos Coelho, the prime minister, wants Portugal to emulate Ireland by making a "clean exit" from its rescue programme without the backstop of an EU credit line to smooth the country's return to financial markets. But, unlike Ireland, Portugal is still rated at below investment grade by credit rating agencies, while its borrowing costs remain much higher than the 10-year yields of about 3.5 per cent enjoyed by Ireland. In a recent report, Fitch Ratings said although Portugal's 2013 funding needs were fully covered, meeting its 2014 financing requirements could pose a problem unless a so-called "precautionary programme" were negotiated with international creditors. Fitch estimates Lisbon's borrowing requirements at €26bn (about 15 per cent of national output) in 2014 and €25bn in 2015. Allowing for remaining bailout funds and existing deposits, the agency calculates that this would leave a borrowing requirement of about €14bn to be covered by bond issues next year. However, bond exchanges like the swap planned for Tuesday will help reduce bond redemption requirements. This, together with expected bond purchases on the primary market by Portugal's social security fund and more use of retail savings products, could lower overall funding needs.