(Recasts with rise in Portuguese yields, fresh comments)
By Emelia Sithole-Matarise
LONDON, July 15 Portuguese bond yields rose anew
on Tuesday, as concern persisted over the exposure of Baco
Espirito Santo, the country's largest listed bank, to the
troubled companies of its founding family.
The bonds came under renewed pressure as shares in BES
hit a record low of 0.3550 euros, with some equity
traders citing worries that the founding family sold shares in
the bank on Monday too cheaply.
The family sold a 5 percent stake in BES on Monday at 0.34
euros a share to inject new blood into the bank. A new chief
executive was also brought in at the bank, as it tried to
reassure investors that it was financially stable.
Portuguese 10-year yields rose as much as 7
basis points to 3.90 percent, lifting yields on fellow
junk-rated Greek bonds in their wake.
"Clearly, the mood has not calmed down yet given the complex
situation surrounding BES and its holding company. The sell-off
in BES shares is putting Portuguese and Greek bonds under
pressure," said Jean-Francois Robin, a strategist at Natixis.
Portuguese and Greek bonds underperformed other low-rated
euro zone debt. Market participants said last week's contagion,
when the losses spread to Italy and Spain, appeared to be over.
It was the first episode of such weakness this year.
Market action suggested that investors were differentiating
between junk-rated Portuguese and Greek bonds and the more
liquid and investment-grade Italian, Spanish and Irish debt.
Spanish 10-year yields were 4 bps down at 2.74
percent. The Italian equivalents were 2 bps lower at 2.86
"The sell-off of a few days ago is an opportunity to come in
and do some bottom-picking," said Ciaran O'Hagan, a strategist
at Societe Generale.
"The problems in Portugal are a storm in a tea-cup. They
relate to a holding company, not the bank, so there's no
systemic risk and there's no hit to the public purse."
Dovish comments from European Central Bank President Mario
Draghi overnight underpinned demand for most euro zone bonds.
Draghi said late on Monday that policymakers were prepared
to use unconventional measures to address the risk of too
prolonged a period of too-low inflation. Quantitative easing, or
money printing to buy assets, was part of the bank's mandate, he
said. He also said a stronger euro exchange rate was a risk to
the sustainability of the euro zone recovery.
The ECB's ultra-easy monetary policy and the possibility it
might eventually begin an asset-buying programme - quantitative
easing - to support the region's feeble economic growth has
fueled a relentless hunt for yield in peripheral bond markets.
"With the ECB signalling that it will continue to maintain
an easing bias with the possibility of QE in coming months,
peripheral spreads probably have scope to come further in," said
Nick Stamenkovic, a bond strategist at RIA Capital Markets.
"We prefer Italy and Spain to Portugal at this juncture ....
This idiosyncratic risk (in Portugal) has raised concerns that
there could be further problems coming in the future. Spain by
contrast is much further forward in bank recapitalisation while
Italy is making progress."
German 10-year yields, the benchmark for euro zone borrowing
costs, were 2 basis point down at 1.19 percent as
data showed Germany's ZEW analyst and investor sentiment index
fell for a seventh consecutive month in July.
(Editing by Larry King)