Portuguese Yields at New Highs; Greek Talks Plod On

Portuguese government bond yields punched new euro-era highs on Friday on growing investor belief the country may follow in Greece's footsteps and require a second bailout, keeping safe-haven German Bunds well bid.

AP

Investors remained on edge as Greece's talks with private creditors to restructure its debt plodded on, cooling the rally in equities and other riskier assets spurred by the U.S. Federal Reserve's pledge to keep interest rates low.

Greece needs a deal quickly with its creditors to avert an unruly default when a major bond redemption comes due in March.

The creditors are demanding that the European Central Bank contribute to a deal to put the country's messy finances back on track.

"There's a bit of chatter about progress in Greek talks but I'm not convinced and Portugal (is) struggling, to put it mildly. The only time we've seen the ECB buying was in Portugal this week, we haven't seen them anywhere else," a trader said.

The 10-year Portuguese bond yield rose by around 25 basis points on the day to 15.36 percent, while the five-year yield was up 24 bps at 20.48 percent, with the moves exacerbated by dwindling liquidity.

The moves accentuated the inversion of the yield curve, where shorter-dated yields are now above those of longer maturities, mirroring trends in Greek bonds before Athens sought a second bailout last year.

In a normally functioning market, investors demand a higher yield to compensate for the risk of holding the paper for a longer period.

"The market is increasingly starting to believe a second bailout for Portugal will be sooner rather than later," said Nick Stamenkovic, a rate strategist at RIA Capital Markets.

Spain Outperforms

Nerves around Greece and Portugal prompted some investors to book profits in Italian debt after the rally in the previous session, which pushed its 10-year yield below 6 percent for the first time in six weeks.

The 10-year yield popped back slightly above 6 percent, with traders also pushing for cheaper prices to make way for up to 8 billion euros in Italian bonds on Monday.

Spanish yields however extended their falls, dipping below 5 percent to their lowest levels since late 2010 at 4.87 percent with traders citing some buying from Asian investors. This tightened the 10-year yield spread over German Bunds by 14 bps to 297 bps.

The Bund future was last 20 ticks up at 138.89 compared with 138.69 at Thursday's settlement with 10-year Bund yields down 1.4 basis points at 1.86 percent.

"The 'Tier 2' (Spain, Italy, Belgium) spread tightening leg versus Bunds looks firmly entrenched and the pressure... On Portugal, seems to prevent a larger upward correction in Bund yields," Commerzbank strategists said in a note.

"Yet, following the drop in safe-haven yields this week, we see a consolidation in Bunds going into the weekend, albeit safely below 2 percent."