* Portuguese, Irish fortunes diverge as Lisbon thrown into
* Portugal requests aid review delay to August
* S&P raises Irish ratings outlook, debt appeal
By Ana Nicolaci da Costa and Emelia Sithole-Matarise
LONDON, July 12 Portuguese yields climbed on
Friday after Lisbon delayed its creditors' next review of the
country's bailout due to a political crisis, but other euro zone
borrowing costs fell.
Portuguese debt lagged that issued by bailed-out peer
Ireland, whose yields fell after Standard & Poor's upgraded the
country's ratings outlook, highlighting their diverging fortunes
and accentuating investor differentiation between their bonds.
Lisbon's international lenders were due to begin a review of
the programme on Monday but the country asked for a delay until
late August as the political crisis deepened.
The opposition Socialists demanded a renegotiation of
Portugal's bailout terms, raising a hurdle to a cross-party pact
the president says is needed to end the country's dependence on
international funding next year.
Shorter-dated Portuguese yields rose faster than longer ones
as investors priced in growing credit risk, while the moves were
exacerbated by thin liquidity in Portuguese debt markets.
"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.
Portuguese 10-year yields climbed 56 basis
points on the day to 7.53 percent while five-year yields
rose 78 bps to 7.33 percent.
The gap between five- and ten-year Portuguese yields
narrowed to 23 basis points - its lowest since July last year -
and taking coming closer to an inversion in the yield curve.
Normally, longer-dated bonds offer comfortably higher
returns than short-dated ones to compensate for the risk of
holding an asset for a long time.
In a sign of scarce liquidity, the difference between the
yield implied by prices buyers offered and those sellers wanted
to be paid for Portuguese 10-year bonds was at 3 cents to the
euro - its highest since August last year. The Italian
equivalent was at 0.1 cents to the euro.
Ten-year Irish yields fell as far as 3.83
percent, and its gap versus equivalent Portuguese yields hit its
widest since November. Irish yields were down 4.9 bps at 3.92
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.
Other peripheral markets also remained resilient to the
sell-off in Portuguese debt as investors still had faith on the
ECB's bond-buying backstop and domestic investors' willingness
to support Italian and Spanish debt markets.
Demand for other euro zone debt also firmed after U.S.
Federal Reserve President Ben Bernanke this week talked down
expectations of imminent stimulus withdrawal and reassurances by
the ECB that interest rates would stay low while inflation was
"I don't think we should have a lot of contagion coming from
Portugal. This is a very specific story," Cyril Regnat, fixed
income strategist at Natixis said.
Spanish 10-year yields were down 6 bps at 4.75
percent, recouping some of the ground lost versus Italy, whose
yields were 1.2 bps lower at 4.48 percent.
An Italian ratings downgrade this week hurt Spanish debt
particularly hard as investors feared more rating cuts could be
coming. At just one notch above junk, Spain is most at risk of
facing forced selling by investors who track benchmark bond
indexes with minimum rating rules.
At the euro zone's core, German Bund futures rose
71 ticks to 143.64, pushing 10-year German yields lower.