Portuguese yields jump after Eurogroup rejects fiscal relaxation
* Portuguese debt hammered after Eurogroup comments
* Bunds reverse losses after U.S. data
* Fed decision on whether to cut stimulus looming
By Marius Zaharia
LONDON, Sept 13 (Reuters) - Portuguese yields spiked on Friday after euro zone finance ministers postponed a more detailed discussion on Lisbon's economic woes until November and rejected its proposal for softer fiscal targets.
The head of the Eurogroup, Jeroen Dijsselbloem, said Portugal should stick to the agreed 4 percent deficit goal for next year after deputy Prime Minister Paulo Portas said on Wednesday that it should be 4.5 percent of gross domestic product.
Wrangling over the degree of austerity that Portugal should implement nearly led to a government collapse earlier this year.
A detailed discussion about Portugal was postponed until November, with markets eager to know how Europe thinks the end of the country's bailout programme should be handled.
Investors fear that if Lisbon is not in a position to sell debt regularly in the market after the end of its current bailout, any new aid deal might entail a Greek-like debt restructuring provision.
Fellow bailout recipient Ireland has already declared it would ask the euro zone bailout fund for a 10 billion euro credit line to ease its return to the markets.
Two-year Portuguese yields jumped 44 basis points to 6.15 percent, while 10-year yields rose 16 bps to 7.44 percent. Shorter-term yields usually rise faster than longer-term ones when investors see increased risks that they may not be repaid in full.
"It's very sad ... it's the credit stress trade," Commerzbank rate strategist David Schnautz said. "The news from the Eurogroup suggests that there's no clear commitment to deal with the issue in a timely manner."
German Bunds fell early in the session in line with U.S. Treasuries on a media report that U.S. President Barack Obama was close to nominating former Treasury Secretary Lawrence Summers as the next Federal Reserve chief.
Japan's Nikkei newspaper, quoting unnamed sources, said in its original Japanese version that Obama was "in the final stages" and moving toward naming Summers. The English-language version said the president "is set to" name Summers as early as late next week. Asked about the story, a White House spokeswoman said Obama had not made his decision about the Fed job.
Some investors expect a Summers-led Fed would adopt a more hawkish monetary policy stance than under current incumbent Ben Bernanke, who is close to starting to scale back the massive Fed asset purchases he has shepherded.
Bunds later recouped their losses after data showed U.S. retail sales rose less than expected in August while inflation pressures remained benign.
"Throughout the day we've had speculation that Summers would be nominated by Obama but since then the data we just had from the U.S., the PPIs and the retail sales were borderline disappointing," one trader said.
The Bund future closed 21 ticks higher on the day at 137.99, having traded as low as 137.17 earlier. Cash 10-year yields fell 2 bps to 1.92 percent.