Portuguese bond yields rise on BES concerns, weigh on periphery

Fri Aug 1, 2014 11:20am EDT

* Portuguese bonds suffer, drag peripheral yields up

* Weak U.S. jobs data helps stem sell-off

* Expectations of ratings upgrade cap rise in Greek yields (Adds fresh quote, updates prices)

By Emelia Sithole-Matarise and John Geddie

LONDON, Aug 1 (Reuters) - Portuguese bond yields rose on Friday, weighing on other lower-rated euro zone sovereigns, amid expectations Lisbon will bail out the country's biggest bank after it reported massive losses.

Banco Espirito Santo's problems intensified this week, when it posted a worse-than-forecast 3.6 billion-euro loss and saw its top officials suspended over suspected harmful management. Its shares fell to record lows before being suspended.

"The Banco Espirito Santo problems don't seem to be going away that easily," said Alessandro Giansanti, an ING strategist.

Portuguese 10-year yields hit highs of 3.78 percent in early trading, up some 14 basis points on the day. They pared losses in the afternoon after a lower-than-expected reading of U.S. nonfarm payrolls.

Weak jobs data in the world's largest economy makes it less likely the United States will raise interest rates soon - a move investors fear would push up government borrowing costs globally.

As European markets drew to a close on Friday, Portugal's yields were 6 bps higher at 3.70 percent. Italy and Spain equivalents were 4 bps and 3 bps higher respectively, at 2.73 and 2.54 percent . Irish yields were 2 bps up at 2.25 percent.

Analysts said the Bank of Portugal would prefer that BES raise capital from private sources, but shaken investors may not stump up the full amount, leaving the government to fill the gap.

"Portugal have said they want capital for BES from private investors, but I don't think it will be enough. They will need to use the money set aside for banks and that should be enough to cover any further recapitalisation of the bank," said ING's Giansanti.

Portugal, which just emerged from a sovereign bailout in May, has 6.4 billion euros of funds for bank recapitalisations.

But while BES' problems seem manageable in isolation, some in the market fear the wider repercussions of bank stress tests due to be published in October.

"I don't think the latest BES news is particularly negative for the sovereign ... but maybe people are thinking there could be more of these. Maybe the AQR (Asset Quality Review) will make us more focused on the bank-sovereign link in the coming months," said Steven Major, global head of fixed income research at HSBC.

ANTICIPATING MOODY'S

Greek 10-year bond yields, which usually see larger swings because of their low liquidity, were up 4 bps at 6.09 percent. They fell earlier as investors anticipated a credit ratings upgrade from Moody's later in the day.

Moody's has an extremely speculative Caa3 rating on Greece, the worst in the euro zone. It is scheduled to review the rating on Friday, although any announcement will come after the market closes.

Some market participants say an upgrade looks possible. Greece's economic outlook has improved and it held two successful debt sales this year, after its 2012 default.

Moody's one-notch upgrade of Portugal's ratings despite the problems facing its biggest bank fuelled expectations of similar action for Greece.

"Moody's is still lagging the other rating agencies, so a bit of a catchup upgrade for Greece by about up to two notches is very possible," said Rainer Guntermann, a strategist at Commerzbank. "It won't come as a big shock to the market, but as always with official confirmation some accounts may feel more comfortable in adding to their positions (on Greek bonds)." (Editing by Larry King)