* Portugal parties fail to reach "national salvation" pact
* President says coalition to stay; bond rally seen capped
* Italian, Spanish bonds gain as world equities rally
By Emelia Sithole-Matarise and Marius Zaharia
LONDON, July 22 Portugal's bond yields fell on
Monday after its president ruled out a snap election following
the collapse of talks among the main political parties on
supporting Lisbon's bailout.
President Anibal Cavaco Silva said on Sunday he wanted the
ruling centre-right coalition to stay in place to keep the
rescue programme on track. He had demanded a "national
salvation" pact to see the 78 billion euro bailout through to
its scheduled conclusion next year, after a rift within the
ruling coalition threatened to derail it.
Portuguese 10-year yields fell 54 basis points
to 6.47 percent and five-year yields dropped 61 bps to 6.02
percent, on relief elections that could have
prolonged uncertainty had been avoided.
Portuguese bonds outpaced other euro zone debt. Ten-year
yields posted their biggest one-day fall since Jan. 2, extending
last week's retreat from near 8 percent.
The cost of insuring Portuguese debt against default via
five-year credit default swaps fell 40 bps to 462 bps, according
to data monitor Markit. That was some 80 bps lower than its peak
on July 12 but still almost 200 bps above levels two months ago.
"They have found a good temporary solution to their crisis
... government stability is the most important thing in all the
peripheral countries," one trader said. "The market has stepped
back from the brink at least for now."
Market participants said the scope for further sustained
falls in yields was limited as investors remained concerned
about the fragile coalition's ability to steer Portugal out of
its bailout in 2014 as planned.
Failure to issue new debt could force Lisbon to seek another
bailout, a burden investors say official creditors may be
unwilling to carry alone, raising the possibility of a
"It would be wrong to take this morning's relief rally ...
as signalling the all-clear in terms of Portuguese political
risk and the threat this represents regarding the potential need
for additional official creditor support," Rabobank strategists
said in a note.
A second trader said buying interest came mainly from
domestic investors and cautioned against reading too much into
the Portuguese rally given low volumes.
An indication of the thin trade was the gap between the
price bidders were willing to pay and that which holders wanted,
which remained at over 2.5 cents in the euro, similar to levels
seen since the political crisis began earlier this month. In
most other euro zone markets the gap was around 0.1 cents.
Among other lower-rated euro zone debt, Italian and Spanish
bond yields dipped as demand for riskier assets grew after
Japanese Prime Minister Shinzo Abe's victory in weekend
elections, which was seen as a boost for his stimulus policies.
Spanish 10-year yields fell 5 bps to 4.60
percent, with investors unfazed by pressure on Prime Minister
Mariano Rajoy to explain his stance on a party funding scandal.
Italian equivalents fell 8 bps to 4.33 percent.
Benchmark German 10-year yields were flat at