(Corrects paragraph 3 to clarify parties seeking deal on
* Investors remain nervous before June 21 talks deadline
* Spanish debt market shrug off growing political tensions
* Rest of market steady as Bernanke testimony eyed
By Emelia Sithole-Matarise
LONDON, July 16 Portuguese bond yields dipped on
Tuesday as the bailed-out country's political parties agreed
talks to end a crisis, though investors doubted a deal would be
Portuguese bonds found a firmer footing in a stable euro
zone debt market with Prime Minister Pedro Passos Coelho
expected to survive a vote of no confidence due on Thursday
called by the smaller Green Party.
Questions remained over whether Coelho and Socialist Party
leader Antonio Jose Seguro can reach a deal by a July 21
deadline on painful austerity policies linked to the country's
Five-year yields fell 10 basis points to 7.17
percent while 10-year yields eased 4 bps to 7.35
percent, retreating from highs near 8 percent hit last week
after Lisbon delayed a review of its bailout due to the crisis.
Although five-year bonds have recouped some of last week's
losses, the 5/10-year yield gap remained near its narrowest
since June 2012, reflecting elevated credit risk.
When investors see risks a country may not fully repay its
debt, they quote its bonds by price instead of yield as they are
more concerned about what they can recover than their return.
Portuguese 10-year bonds traded at some 83 cents in the euro.
"They have done a reasonable job on the austerity programme
but ... this political uncertainty doesn't help and it remains
to be seen on how flexible the Socialist Party is going to be on
austerity," said Lyn Graham-Taylor, a strategist at Rabobank.
"The market remains nervous and the reason why the curve has
aggressively flattened at the front end is that people are
getting concerned that some kind of haircut may be required
before they can get back to the market. I still think we are a
long way from that possibility being discussed."
RESILIENT SPANISH BONDS
Euro zone debt investors were wary of putting on big
positions before U.S. Federal Reserve Chairman Ben Bernanke's
semi-annual congressional testimony on Wednesday and Thursday on
the future of the central bank's massive bond purchases.
The Spanish market shrugged off mounting pressure on Prime
Minister Mariano Rajoy to resign over a party financing scandal.
Rajoy on Monday rejected opposition calls for him to quit and
said his reform plans would not be held back.
Spanish 10-year yields were up 2 bps at 4.71
percent while equivalent Italian yields were up by
a similar amount at 4.48 percent.
RBC strategists, however, urged caution against extending
exposure to Spanish bonds beyond shorter-dated maturities that
fall within the scope of the European Central Bank bond buying
scheme that has eased the debt crisis over the past year.
(Editing by Nigel Stephenson)