Portuguese yields fall but investors remain cautious

Portuguese yields fell today after the country’s political crisis appeared to ease while the European Central Bank’s commitment to keep interest rates low buoyed other lower-rated euro zone bonds.

Investors were cautious, however, before US jobs data that could keep the Federal Reserve on course to start reducing its monetary stimulus later this year.

Portuguese prime minister Pedro Passos Coelho said yesterday he had found a way to preserve the government's stability after the resignation of two ministers triggered a crisis that threatened the country's ability to exit its €78 billion bailout.

He cautioned that full details were still to be agreed.

But Portuguese yields, which topped 8 per cent earlier this week, were already falling after the ECB’s steer on interest rates, which suggested that it might even cut them further.

Portuguese two-year yields fell 37 basis points to 5.66 per cent while 10-year bonds yielded 7.08 per cent, down 32 bps.

The fall in shorter-dated yields was, however, insufficient to reverse the sharp underperformance of longer-term maturities this week which saw the yield curve at its flattest since March 2012, reflecting perceptions of rising credit risk.

“I don’t expect the haemorrhage that we saw in the Portuguese bond markets to continue as it seems now the resignation of the foreign minister seems to be an isolated event within his party,” KBC strategist Mathias van der Jeugt said.

Potential fallout to other peripheral euro zone bonds, particularly Italy and Spain, from any setback in Lisbon's efforts to shore up its government could be tempered by the ECB's commitment to easy monetary policy, traders said, provided U.S. jobs data does not overshoot expectations.

“The ECB’s very dovish stance is supporting the periphery, especially the front end, and we expect that to continue barring a surprise to the upside in the NFP (non-farm payrolls),” a trader said.

Italian and Spanish yields were down 6 bps at 4.37 and 4.59 per cent respectively. The ructions in Portuguese assets pushed Italian and Spanish yields higher this week but the rise was tempered by the ECB’s pledge to buy the bonds of countries that seek help..

Among higher-rated bonds, the rally in German Bunds stalled as investors turned cautious before the US data.

The Bund future was last 10 ticks down at 142.20 with cash 10-year yields 1 bp up at 1.67 per cent.

Reuters