* Portugal requests aid review delay to August
* Lisbon wants time to resolve political crisis
* Irish bonds advance after S&P raises its ratings outlook
* Other euro zone bonds gain on Fed, ECB policy reassurances
By Emelia Sithole-Matarise
LONDON, July 12 Portuguese government bonds
underperformed other euro zone debt on Friday after Lisbon
delayed its creditors' next review of the country's bailout due
to its political crisis.
The country's debt bucked a firmer tone in the rest of the
region's bond market after U.S. Federal Reserve President Ben
Bernanke this week talked down expectations of tighter monetary
policy and reassurances by the European Central Bank that
interest rates would stay low while inflation was moderate.
Portugal's international lenders had been due to begin a
review of the programme on Monday but the country asked for a
delay until August after President Anibal Cavaco Silva rejected
a plan to heal a government rift, throwing the country into
Portuguese two-year yields rose 21 basis points
to 5.98 percent while 10-year yields were up 12
bps at 7.10 percent, with little respite seen in the near term.
In contrast, and highlighting the divergence in bailed-out
countries' fortunes, equivalent Irish yields fell
5 bps to 3.92 percent after Standard & Poor's raised the
country's ratings outlook to positive from neutral, saying it
may beat its fiscal targets.
The S&P move fueled expectations that Moody's, the only
major rating agency that rates Irish sovereign debt as "junk',
could at least take the country, which is on course to exit its
bailout, off negative watch.
"Portugal is struggling as the government delays the next
quarterly review ... which is clearly fueling fears that
Portugal doesn't have the appetite for further fiscal
consolidation measures in place," said Nick Stamenkovic, a rate
strategist at RIA Capital Markets.
Shorter-dated Portuguese debt resumed their underperformance
of longer-term bonds, pinching their yield gap to its narrowest
in nearly 16 months at around 123 bps, as investors fret that
Lisbon might have to restructure its debt in the future.
Sentiment in the rest of the euro zone was upbeat on the Fed
and ECB rate outlooks, with Spanish 10-year yields
down 11 bps at 4.71 percent while Italian equivalents were 4 bps
lower at 4.46 percent.
Spanish bonds regained some ground over Italian peers after
a sharp underperformance in the previous two sessions after an
S&P ratings downgrade of Italy raised fears Spain might be next
- which could see it lose investment-grade status.
Some market participants said the sell-off was overdone.
"While we see Spain as more vulnerable than Italy to further
downgrades, we do not expect imminent rating actions that can
take Spain out of the IG (investment grade indices)," Barclays
Capital strategists said.
They pointed to the fact that S&P had only a month ago
reaffirmed Spain's rating at BBB- and negative outlook. Fitch
rates the country BBB with a negative outlook while Moody's has
it on Baa3 also with a negative outlook.
"Therefore, for Spain to fall from the IG indices, they have
to be downgraded by Fitch by two notches and also one notch by
Moody's," the Barclays strategists said in a note.
At the euro zone's core, German Bund futures rose
41 ticks to 143.34 with the 10-year cash yield 3.3
bps down at 1.59 percent, tracking firmer U.S. Treasuries after
a solid 30-year T-bond auction on Thursday.
"Bernanke devalued the tapering fears a little bit. I don't
see any reason why we should sell off going into the weekend.
The tone in the market is OK," one trader said.