EURO GOVT-ECB said buying bonds after Portugal yields soar

Thu Feb 10, 2011 8:56am EST

* Portuguese 10-year bond yield hits euro-era high

* Peripheral yields off highs as traders cite ECB buying

* Periphery pressured on EFSF reform pessimism

* Bunds lifted by safe-haven flows as investors shun risk

By William James

LONDON, Feb 10 (Reuters) - The European Central Bank stepped in to buy Portuguese bonds on Thursday, traders said, after yields on the country's debt hit euro-era highs on a perceived lack of progress towards resolving the bloc's year-long crisis.

Portuguese 10-year bond yields soared to 7.656 percent, topping the previous record set in November, as market patience over the lack of a deal on reforms to tackle the debt crisis wore thin.

Portugal is seen as the next euro zone country most vulnerable to requiring a bailout after Greece and Ireland.

"A couple of sellers came in yesterday and now the market wakes up this morning and thinks 'I'm long Portugal, yields are at their record highs and there's been no resolution -- sell it'," a trader said.

The move prompted the ECB to resume its programme of buying debt to stabilise the euro zone's most fragile markets, traders said. Portuguese yields fell back to 7.404 percent, only slightly higher on the day.

Traders said the ECB mainly bought Portuguese bonds and not in large amounts relative to purchases when the programme was launched. The bank said on Monday it had bought 76.5 bilion euros of bonds since May, but none in the last two weeks.

Yields on Portuguese debt have risen for six straight sessions as disappointment over slow progress towards reform of the euro zone rescue fund and the poor performance of its newly-launched benchmark spooked investors.

"By all accounts the (EU) summit last week was pretty acrimonious and there was a bit of finger pointing," said Alan McQuaid, chief economist at Bloxham Stockbrokers.

"It adds to the impression there is not a unified front within Europe and in times of uncertainty you're better off in core rather than peripheral paper." <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Graphic showing Portuguese bond yields above 7 percent

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Graphic showing ECB bond purchases

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The Portuguese 10-year government bond yield spread over Germany widened to 440 bps, up more than 30 bps on the day before reversing direction, falling back to 410 bps on the talk of ECB buying.

Portuguese stocks .PSI20 fell 2.03 percent, far exceeding a 0.8 percent drop on the pan-European FTSEurofirst 300 .FTEU3. The German Bund future FGBLc1 gained as a result of the tension, rising as much as 65 ticks to 122.98.

Other peripheral bond yields also rose relative to German debt on a building sense of unease in the periphery, despite recovering ground as Portuguese spreads tightened.

POOR SYNDICATION

Traders highlighted Portugal's five-year syndicated bond sale this week as a sign of waning investor appetite to hold the country's debt. The bond has traded poorly in the secondary market, adding to worries over Portugal's ability to access the market to raise the 18-20 billion euros it has targeted in 2011.

The indicative bid price on the bond PTOTEPOE0016=R earlier fell as low as 97.29 -- well below the initial reoffer price of 99.762, driving the yield above 7 percent and leaving investors who bought the issue potentially holding paper at a loss.

Peripheral euro zone debt had rallied in late January as markets grew increasingly confident European Union leaders were making progress on a deal to strengthen the European Financial Stability Facility (EFSF), the euro zone bailout fund.

The 10-year German bond yield DE10YT=TWEB was 3.288 percent, down 2.1 bps while the two-year Schatz yield DE2YT=TWEB was 0.7 bps lower at 1.449 percent.

(Additional reporting by Scott Barber, Nia Williams, Dominic Lau and Emelia Sithole-Matarise; Editing by Susan Fenton)

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