March 11, 2014 / 1:40 PM / 3 years ago

Peripheral euro zone debt yields rise as rally pauses

* Italian, Spanish debt yields rise from historic lows

* Portugal, Ireland buck trend

* Portugal's GDP grows a revised 0.6 pct in Q4

By Joshua Franklin

LONDON, March 11 (Reuters) - Yields on most euro zone periphery debt rose on Tuesday as the market took a breather after a recent rally that took yields to historic lows.

Greek, Italian and Spanish bond yields all pushed higher, though Portuguese and Irish debt bucked the trend among lower-rated bonds.

"It's more of a pause for breath if you like. I don't think this is the beginning of any fundamental underperformance just yet... We're just getting to levels where additional progress might become increasingly tricky," said ICAP strategist Philip Tyson.

Yields on 10-year Spanish bonds rose 2.6 bps to 3.34 percent, lifting off Monday's eight-year lows of 3.31 percent. Italian 10-year yields rose 3.6 bps to 3.41 percent after matching Thursday's eight-year low on Monday.

Greek 10-year yields were up 11 bps at 7.06 percent, rising for a third consecutive session.

But demand for these bonds should return as investors look for higher returns, said Norbert Wuthe, a strategist at Bayerische Landesbank in Munich.

"In general, peripheral countries remain attractive and this is because of the yield pick-up," he said. "As long as there's the environment with growing global liquidity and core countries like Germany show extremely low yields, peripheral countries and semi-core countries remain attractive."

Portugal has benefited recently from increasing optimism it could follow Ireland out of its EU/IMF bailout later this year.

"There are still some question marks there about (Portugal's) constitutional court. It has in the past blocked reform issues," ICAP's Tyson said. "But it's performed well. We've seen some successful (debt) issues and the market is anticipating it exiting without any issues."

Data on Tuesday showing Portugal's economy grew a revised 0.6 percent in the fourth quarter, accelerating from the previous quarter's 0.3 percent growth was also positive for the country's debt.

Yields on 10-year Portuguese bonds fell 3.2 bps to fresh near four-year lows of 4.46 percent.

Irish 10-year yields dipped 1.7 bps to 3.07 percent after announcing on Monday the country's first regular bond auction since it exited it's EU/IMF bailout in December. It will auction 1 billion euros of 10-year bonds on Thursday.

In core euro zone markets, German 10-year yields rose by 0.9 bps to 1.64 percent. Earlier, Bunds' yield premium to U.S. Treasuries hit its highest since mid-2006 at 117 bps, according to Reuters data.

The spread has widened since the European Central Bank, which kept interest rates unchanged last Thursday. By contrast, the U.S. Federal Reserve is scaling back its monetary stimulus.

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