| LONDON, July 16
LONDON, July 16 Portuguese bond yields fell on
Wednesday, with investors more optimistic that the country's
largest listed bank can deal with the financial troubles faced
by its founding family, although uncertainty remained high.
Rioforte, which indirectly owns a stake in Banco Espirito
Santo, was preparing to file for creditor protection in
Luxembourg, where it is based. The news hurt
Portuguese government debt in early trade, but the bonds
recovered later as the stock market opened and BES shares rose.
The bank's shares have been recovering since late on
Tuesday, when its chief executive said it was well capitalised
and investor appetite for riskier assets picked up on the back
of strong earnings from U.S. banks and dovish comments from Fed
chief Janet Yellen.
Portuguese 10-year government bond yields fell
10 basis points to 3.74 percent. They have regularly seen daily
swings of more than 10 bps over the past week, having briefly
broken above 4 percent in the process.
"It's a complicated set-up at the bank and Portuguese
government bonds have been a victim of the BES case," said
Rainer Guntermann, rate strategist at Commerzbank.
"But we're probably moving on to a phase in which the market
thinks it doesn't necessarily have to lead to a spillover into
the government bond market or other markets."
The government and the central bank have repeatedly said
that BES is able to deal with any exposure to the troubled
companies of its founding family as it has 2.1 billion euros in
capital above the minimum regulatory requirements.
The Portuguese government also has a residual 6 billion
euros from its rescue programme available for its banking sector
if needed and the Treasury has built a financial buffer, having
already raised some of the funds it will need for next year.
"The market is more upbeat that BES is not doing so badly
and they can even raise more capital if necessary," one trader
said. "It looks more and more like an idiosyncratic risk."
Most other euro zone yields fell, as Federal Reserve Chair
Janet Yellen's testimony before a Senate committee on Tuesday
maintained expectations of ultra-low interest rates for the
Better-than-expected Chinese growth figures also spurred
appetite for high-yielding assets.
Germany sells 10-year Bunds later in the day.
(Reporting by Marius Zaharia)