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Portuguese yields extend fall on GDP, PM austerity pledge
March 11, 2014 / 5:35 PM / 4 years ago

Portuguese yields extend fall on GDP, PM austerity pledge

* Portugal, Ireland outperform other euro zone bonds

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

* Portuguese premier dismisses new call for debt restructure

By Emelia Sithole-Matarise and Joshua Franklin

LONDON, March 11 (Reuters) - Portuguese yields fell to fresh four-year lows on Tuesday after an upward revision to fourth quarter GDP growth and the prime minister rejected new calls to restructure the country’s debt.

Junk-rated Portuguese bonds outperformed other euro zone bonds as the market took a breather after a rally that led Italian and Spanish yields to historic lows.

Data showed Portugal’s gross domestic product grew a revised 0.6 percent in the fourth quarter, accelerating from the previous quarter’s 0.3 percent growth.

Prime Minister Pedro Passos Coelho dismissed as potentially harmful a call for a “responsible debt restructuring” launched by 70 veteran political figures, unionists and businessmen. Coelho said such a plan would send the wrong message to the country’s international lenders who expect it to keep on track with its fiscal reforms.

His comments and the data accelerated a fall in the country’s bond yields, which hit 2010 lows recently on increasing optimism Portugal could follow Ireland out of its EU/IMF bailout later this year.

Yields on 10-year Portuguese bonds were last 6 basis points down at 4.43 percent while two-year yields dropped 15 bps to 1.52 percent.

“Clearly these comments (by Coelho) today have helped reassure investors and helped to trigger another rally in Portuguese bonds over this session,” said Philip Shaw, chief economist at Investec.

“There’s a wall of cash looking for higher yields given the low interest rate environment and any good news in these economies is seen as a justification to buy.”

QUESTIONS

Portuguese 10-year yields have tumbled 1.5 percentage points since the start of this year and are now way below the 17 percent peaks hit at the height of the euro zone debt crisis in early 2012.

Although there were lingering concerns that the country’s Constitutional Court might present hurdles for further reforms, many in the market saw scope for the yields to extend falls in coming days as investors continue to look for higher returns.

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

Also bucking an upward trend in yields on other peripheral euro zone bonds on Tuesday, Irish 10-year yields dipped 3 bps to 3.06 percent after Dublin announced on Monday its first regular bond auction since it ended its EU/IMF bailout in December. It will auction 1 billion euros of 10-year bonds on Thursday.

Greek, Italian and Spanish bond yields all pushed higher, though Portuguese and Irish debt bucked the trend among lower-rated bonds. Italian 10-year yields rose 3 bps to 3.41 percent while Spanish equivalents were 1 bps up at 3.32 percent, both pushing off eight-year lows.

“It’s more of a pause for breath. 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’s Tyson.

In core euro zone markets, German 10-year yields rose 1.5 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 kept interest rates unchanged last Thursday while the U.S. Federal Reserve is scaling back its monetary stimulus.

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