Portuguese yields fall as Lisbon seeks to resolve crisis

Fri Jul 5, 2013 5:12am EDT

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* U.S. jobs data caution tempers ECB rate euphoria

By Emelia Sithole-Matarise

LONDON, July 5 (Reuters) - Portuguese yields fell on Friday 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 U.S. 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 on Thursday 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 euro bailout.

He cautioned that full details were still to be agreed.

But Portuguese yields, which topped 8 percent earlier this week, were already falling after the ECB's steer on interest rates e European Central Bank's unprecedented steer that it might even cut rates further.

Portuguese two-year yields fell 37 basis points to 5.66 percent while 10-year bonds yielded 7.08 percent, 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 percent 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..

U.S. JOBS RISKS

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

"Anything from neutral to better (data) should prevent a decline in yields and will be enough to keep markets and investors convinced that the Fed will start tapering its QE programme from September onwards," KBC's van der Jeugt said.

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

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