* Worries over Espirito Santo empire's financial health
* Strong earnings in the U.S., dovish Yellen ease sell-off
* Markets differentiate between Portugal and non-junk
(Updates prices into close, adds detail, comments)
By Emelia Sithole-Matarise and Marius Zaharia
LONDON, July 15 Portuguese bond yields see-sawed
on Tuesday as concern persisted over the exposure of Banco
Espirito Santo, the country's largest listed bank, to the
troubled companies of its founding family.
An early rise in yields was reversed after upbeat earnings
from JPMorgan and Goldman Sachs renewed investor appetite for
Also supportive of high-yielding assets, Federal Reserve
Chair Janet Yellen told a Senate committee that the U.S.
economic recovery remained incomplete, justifying loose monetary
policy for the foreseeable future.
The bonds had come 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 at 0.34 euros a
share to inject new blood into the bank. A new chief executive
was also brought in, as the bank tried to reassure investors
that it was financially stable.
A holding company of the Espirito Santo banking family, was
preparing to file for creditor protection, sources said.
Portuguese 10-year yields were last 1 basis
point higher at 3.84 percent, having fluctuated within a
3.80-3.95 percent range.
"Clearly, the mood has not calmed down yet given the complex
situation surrounding BES and its holding company," 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 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 down 6 bps at 2.72
percent. Italian equivalents were 3 bps lower at 2.86 percent
"It's interesting that BES hit all assets initially but it
didn't take long at all for these markets that are not directly
linked to the events to recover," said Philip Shaw, chief
economist at Investec.
"That's a healthy reaction and suggests there isn't a great
degree of contagion from the BES story."
Some traders said, though, that they remained concerned over
other potential holes in the finances of the banking family that
have so far remained undiscovered and whether such opacity in
the ownership structure was a more dominant feature of the euro
zone banking system than previously thought.
Dovish comments from European Central Bank President Mario
Draghi overnight also underpinned demand for peripheral 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.
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
fuelled 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."
(Editing by Nigel Stephenson)