* Portugal plans to buy back October 2015 bonds on Tuesday
* Portuguese yields fall across the curve
* Other peripheral yields fall after soft inflation data
By Marius Zaharia and Emelia Sithole-Matarise
LONDON, March 17 Portuguese yields tumbled on
Monday as a plan to buy back bonds maturing in 2015 increased
investor confidence in Lisbon's chances of exiting its bailout
programme this year.
Portugal's 78 billion euro bailout, agreed with the European
Union and the International Monetary Fund in 2011, expires in
May and buying back debt was seen as an indication of its
ability to stand on its own feet.
Lisbon plans to buy back October 2015 bonds on Tuesday - the
second such move this year after it repurchased 1.32 billion
euros of October 2014 and October 2015 bonds last month in order
to ease its redemption burden.
Portuguese two-year yields fell 17 basis points
on the day to 1.54 percent, having hit a four-year low of 1.42
percent last week. Ten-year yields fell 12 bps to
4.52 percent, also close to four-year lows.
"The Portuguese treasury is trying to convince everybody
that it's on its way to being able to fund itself. It's very
good news and it's enough to lead to a continuation of the rally
in Portuguese bonds," DZ Bank strategist Christian Lenk said.
"In terms of size, I would be surprised if the volume
tomorrow would be larger than 1 billion (euros) because
investors are obviously liking Portuguese bonds and a larger
volume would be costly for the treasury."
About 5.6 billion euros remain outstanding in October 2014
bonds and some 8.2 billion in October 2015. A June 2014 bond
worth 4.5 billion also matures soon.
Those figures do not look as challenging as they did at the
height of the crisis, when Portuguese 10-year yields topped 17
percent. Portugal has already covered its 2014 funding needs
after raising 6.25 billion euros from five- and 10-year bonds
via syndication this year.
Better-than-expected economic growth figures and the
government's pledge to maintain fiscal discipline has attracted
healthier demand for its junk-rated bonds as well.
Foreign investors bought almost 90 percent of five-year
bonds and almost three quarters of 10-year bonds at this year's
sales. Demand came mainly from Britain, Scandinavia and the
United States, data from the debt agency showed.
Worries remain that Portugal's constitutional court might
prevent further reforms and some analysts expect Lisbon to seek
a safety net, after the bailout, in the form of a precautionary
credit line which it can tap if it gets into trouble.
Portuguese bonds outperformed all other euro zone debt apart
from Greece, whose market is significantly less liquid and
regularly sees larger price swings.
Spanish, Irish and Italian yields fell 2-3 bps after euro
zone inflation data for February was revised lower to 0.7
percent from a 0.8 percent flash estimate - well below the
European Central Bank's target of just less than 2 percent.
"The picture for ... inflation remains extremely tame and
inflation expectations will continue to be closely watched by
policymakers at the ECB," Annalisa Piazza, market economist at
Newedge Strategy, said.
German 10-year Bund yields, the benchmark for
euro zone borrowing costs, rose 2 bps to 1.57 percent after
Sunday's Russian-backed referendum in Crimea passed without
major violence, reducing demand for safe havens.
Investors also tip-toed back into riskier assets after
Western powers slapped limited sanctions on officials from
Russia and Ukraine. Sunday's Crimea vote came after Moscow
effectively occupied the region after Ukrainian President Viktor
Yanukovich was ousted.
The market showed little concern a day before the German
Constitutional Court ruling on the legality of the euro zone's
bailout fund, the European Stability Mechanism. Many in the
market say Tuesday's ruling is a mere formality after a
preliminary verdict by the same court in 2012 said the ESM did
not violate German law and could go ahead, though it insisted on
veto rights for the German parliament.
The court last month referred a complaint against the ECB's
OMT bond-buying scheme to the Euroepan Court, a move analysts
said could lead to a more positive ruling for the plan widely
credited with easing the euro zone debt crisis.