* Markets more optimistic about BES financial stability
* Portuguese yields fall, but uncertainty persists
* Portuguese T-bill sale goes smoothly
* Investors see limited fallout from Espirito Santo problems
(Updates with new comments)
By Marius Zaharia
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
Federal Reserve chief Janet Yellen.
The government and the central bank have repeatedly said 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 market is starting to come to terms with the situation
regarding BES," said Gianluca Ziglio, an analyst at Sunrise
Brokers. "Authorities in Portugal have been pretty clear that
the bank is well capitalised."
He added, however, that uncertainty about the extent of the
problems the Espirito Santo family was facing kept many
Portuguese 10-year government bond yields fell
8 basis points to 3.76 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.
There was no sense of panic in debt markets.
The Portuguese government 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
raised some of the funds it will need for next year.
"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," said Rainer
Guntermann, rate strategist at Commerzbank
The market for insurance against default suggests many
investors see BES risks as localised.
Five-year Portuguese credit default swaps
hit two-month highs of over 200 basis points last week, having
risen from June lows of 126 bps. In comparison, CDS on BES
hit nine-month highs of 500 bps, having traded as
low as 148 bps in June.
Portuguese CDS last traded 183 bps, while BES's were 416
bps, both lower on the day, according to data from Markit.
Portugal sold the targeted 1.25 billion euros in Treasury
bills, with the yield on the 12-month maturity rising slightly.
"The modest up tick in 12-month yields here should arguably
be seen, at worst, as indicative of an element of caution,"
Rabobank strategist Richard McGuire said. "Meanwhile, the higher
cover ratio ... potentially highlights the ready willingness of
investors to buy on dips."
After a bout of contagion across euro zone peripheral bond
markets last week, the other indebted countries traded
independently of Portugal's woes this week.
Aliki Papasteriou, investment analyst at Nedgroup
Investments, said the fears around BES have been "overplayed"
and opened up a buying opportunity in peripheral debt markets.
A key reason for that is the European Central Bank's promise
to offer banks up to 1 trillion euros in long-term loans from
September at a rate of only 0.25 percent. The measure aims to
encourage banks to lend to businesses and consumers, but if they
don't they can pay back the loans for no penalty in 2016.
"Most of the tail risk in the euro zone has diminished and
going forward support from the ECB ... should keep periphery
yields tight at least until 2016," Papasteriou said.
(Reporting by Marius Zaharia; Editing by Janet Lawrence)