(Adds secondary market yields, analyst comment)
LISBON, March 9 (Reuters) - Borrowing costs in Portugal’s first regular bond auction of the year rose sharply on Wednesday for both five- and 10-year debt, reflecting the renewed concern over the public finances that pushed secondary market yields up last month.
Investors singled out Portugal a month ago as they fretted over the health of Europe’s financial sector and economic growth, sending the country’s bond yields to their highest since 2014 in the secondary market.
On Wednesday, state debt agency IGCP sold a total of 1.215 billion euros in both maturities, near the top end of its indicated offer range of up to 1.25 billion euros.
“It was a solid enough auction, taken on board without too much fuss,” said Orlando Green, debt strategist at Credit Agricole in London as the country’s benchmark 10-year yields fell in the secondary market after the auction.
“Policy risk is the main driver for Portugal ... We must see if the new government is going to hit targets or not, how that shapes up in the coming months.”
The IGCP sold 621 million euros in 2026 bonds at an allotment yield of 3.138 percent, up from 2.43 percent in the previous auction of 10-year bonds in November.
Yields for the 2021 bonds rose to 2.03 percent from 1.42 percent in the previous sale of five-year debt last July, which was its record low.
Demand in the auction outstripped the amount placed by 1.6 times for the 10-year maturity and by 1.54 times for the shorter-dated bonds.
The concern over the public finances were exacerbated by concern about the country’s finances and Lisbon’s eligibility for the European Central Bank’s bond-buying programme under a new left-leaning government that has been reversing austerity imposed by the previous centre-right administration.
The eligibility hinges on the country maintaining its only investment grade rating, from ratings agency DBRS. The agency eased concerns about the country when it said last month it was comfortable with the rating, although it warned of budget risks.
Yields have retreated since but are still higher than where they started the year. The yield on the benchmark 10-year bond fell about 2 basis points to just below 3.01 percent after the auction. (Reporting By Andrei Khalip and Daniel Alvarenga; Editing by Hugh Lawson)