Posted on: 31/Mar/2011
by (Reuters) 31 Mar 2011
Portuguese ten-year yields rose by six basis points to 8.303 percent, with the three-year debt yielding 8.914 percent. Five-year Portuguese credit default swaps rose by 15 bps to 565 bps, on track for the highest close on record, according to provider Markit.
Standard & Poor's downgrade of Greece and Portugal on Tuesday piled on pressure as bond yields were testing new highs already as investors fret that the political limbo in Lisbon will block decision making, complicating its ability to fund itself.
Analysts and traders see further scope for Portuguese yields to converge towards those of Ireland, whose ten-year bonds yield over 10 percent, with many saying it would struggle to fund looming bond redemptions, particularly in June.
"The April redemptions isn't much of an issue but the June payment is much more of an issue," said Eric Wand, a strategist at Lloyds. "If you do get an election towards end-May then you're likely to find a new government in early June then they won't have sufficient time to raise the money.
"Whatever form the government takes in future decides they would struggle ... I don't see them resorting to the open market as an option under current conditions."
Investors also had a selling bias on Irish debt, though its yields remained steady on the day, before Thursday's bank stress tests, which some analyst expect to be followed by credit ratings downgrades.
The Irish government has set aside about 35 billion euros for its debt-ridden banks and the tests are expected to show banks need less than that, but even a surprisingly positive result may be powerless to reverse a rising trend in yields.
Most analysts expect any potentially good news to be countered by a ratings downgrade. When it cut Portugal and Greece's ratings, Standard & Poor's cited the risks the countries' debts to a new European bailout fund would be repaid before bond investors.
Ireland, a receiver of financial aid, faced the same risks mentioned by S&P, but its rating was still three notches higher than Portugal's. S&P said it was "focussed" on the results of the tests and they would have an effect on its next move.
"I think the market is positioned for less (capital than the government has set aside), but it is a pretty enormous figure no matter what," one trader said.
"It is an illiquid market, but the better bias is to sell as Ireland may be downgraded after the stress tests."
Irish/German 10-year debt yield spreads were last five basis points tighter on the day at 683 bps but five-year CDS rose 22 bps to 630 bps.
Some market observers questioned the credibility of the stress tests, pointing to results of similar exercises in the past which prefaced still-deepening banking problems in Ireland and Spain.
"Governments and officials can do a lot of tests, but the question is whether the market is going to believe them," said Michael Leister, strategist at WestLB.
ING strategist Alessandro Giansanti said a steady trend of rising yields in Ireland, supported by expectations it will eventually have to restructure its debt, can only be reversed if the country posted "very good" economic growth data.
Italy meanwhile saw healthy demand at an auction of 9.17 billion euros worth of bonds earlier in the day and the sale signalled further decoupling from troubled markets in Athens, Lisbon and Dublin.
Italian and Spanish spreads over German Bunds have held their own over the past weeks, despite renewed pressure in the euro zone's highly-indebted "periphery" caused by a raft of ratings downgrades and a government collapse in Portugal.
Bund futures settled seven basis points lower on the day at 121.43, weighed down by expectations the European Central Bank will raise rates next week.
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