Portuguese strife weighs on neighbour’s bond yields

Spanish and French borrowing costs rose today on fears that political turmoil in Portugal will reignite the euro zone debt crisis. The higher returns offered drew good demand for both bond sales.

A rift within Portugal’s governing coalition following the resignations of two ministers this week has pushed up yields on bonds of more indebted euro zone countries and favoured safe-haven paper.

Portugal’s own 10-year yields shot above 8 per cent for a time yesterday but have since fallen back somewhat.

Analysts said cheaper prices had helped underpin demand at Spain’s auction of €4 billion of bonds and the French sale, which raised €7.99 billion.

“The recent Portuguese-driven correction has enhanced the attractiveness of Spanish bonds and the auction was taken down very well,” said Nick Stamenkovic, bond strategist at RIA Capital Markets in Edinburgh.

"The outlook in Portugal is very clouded. What's interesting is that Italy and Spain have been relatively resilient."

Spain sold €3 billion of a new five-year bond and €1 billion of an existing three-year bond, while France sold 10- and 15-year bonds.

Both auctions raised all or nearly all their maximum targeted amounts. Spain had to pay between 17 and 20 basis points more than it did to sell similarly-dated debt last month, and the 3.792 per cent yield on the five-year bond was the highest since February.

The yield on the 2016 bond was 2.875 per cent, up from 2.706 per cent when it was last sold a month ago.

Demand for the five-year bond outstripped supply by 1.7 times, while bids for the three-year paper were 3.5 times the offer amount. France’s public debt management agency Agence France Tresor said yields were up by 26-28 basis points from last month, although borrowing costs remain historically low at just 2.32 per cent over 10 years and 2.84 per cent for the 15-year bond.

The yield on Portugal’s benchmark 10-year bond rose 15 basis points to 7.616 per cent as of 12.30 pm in London today. That’s up from 5.19 per cent on May 21st, the lowest in almost three years, and more than double the average interest rate of 3.2 per cent charged for the country’s bailout loans.

Paulo Portas, the minister whose resignation threatened to bring down the Portuguese government, is today trying to patch up the rift with prime minister Pedro Passos Coelho after bond yields surged.

Mr Portas, leader of the coalition government’s smaller party, wants to ensure a “viable solution” to avoid an early election while extracting a “guarantee” that his party will have an influence on policy.

Agencies