* Markets more optimistic about BES financial stability
* Portuguese yields fall tough uncertainty persists
* Portuguese T-bill sale goes smoothly
* Investors see limited fallout from Espirito Santo problems
(Updates prices, adds fresh analyst comment)
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 since it has 2.1 billion euros ($2.84
billion) 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
11 basis points to 3.73 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.
Debt market were calmer after last week's sell-off in
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.
"The market probably read too much across onto the sovereign
impact," said Michael Michaelides, a strategist at RBS.
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 uptick 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.
Analysts 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
do not they can pay back the loans for no penalty in 2016.
"Peripherals can rally further. Our call is for 100 basis
points in 10-year Spain and Italy spreads to Bunds," Michaelides
said. Spain's 10-year yield gap over German Bunds stood at 147
bps while the equivalent Italian spread was at 163 bps.
($1 = 0.7393 Euros)
(Additional reporting by Emelia Sithole-Matarise; Editing by