* Portuguese bonds underperform other euro zone debt
* Expectations of ratings upgrade cap rise in Greek yields
* Price moves in rest of market modest before U.S. jobs data
(Recasts with rise in Portuguese yields, adds new analyst
By Emelia Sithole-Matarise
LONDON, Aug 1 Portuguese bond yields rose on
Friday, maintaining their underperformance compared with the
rest of the euro zone, amid expectations Lisbon will bail out
the country's biggest bank after it reported massive losses.
Banco Espirito Santo's problems intensified this week. The
bank posted a worse-than-forecast 3.6 billion-euro loss and saw
its top officials suspended over suspected harmful management.
Its shares fell to record lows.
This put renewed pressure on Portuguese bonds. Analysts said
the Bank of Portugal would prefer BES raise capital from private
sources, but shaken investors may not stump up the full amount,
leaving the government to fill the gap.
Portugal, which just emerged from a sovereign bailout in
May, has 6.4 billion euros of funds for any bank
recapitalisation and the treasury has already raised cash to
cover financing needs into next year.
The events at BES ahve unsettled some investors. Portuguese
10-year bond yields rose as much as 12 basis
points to 3.87 percent, adding to Thursday's 10 bps jump.
"The Banco Espirito Santo problems don't seem to be going
away that easily," said Alessandro Giansanti, a strategist at
ING. "Portugal have said they want capital for BES from private
investors, but I don't think it will be enough. They will need
to use the money set aside for banks and that should be enough
to cover any further recapitalisation of the bank."
A more cautious tone among investors towards riskier assets
before a U.S. jobs report later on Friday and holiday-thinned
volumes exacerbated the moves in Portuguese bonds.
Greek 10-year bond yields, which usually see
larger swings because of their low liquidity, were up 3 bps at
6.09 percent. They fell earlier as investors anticipated a
credit ratings upgrade from Moody's later in the day.
Moody's has an extremely speculative Caa3 rating on Greece,
the worst in the euro zone. It is scheduled to review the rating
on Friday, although any announcement will come after the market
Some market participants say an upgrade looks possible.
Greece's economic outlook has improved and its held two
successful debt sales this year, after its 2012 default.
Moody's one-notch upgrade of Portugal's ratings despite the
problems facing its biggest bank fuelled expectations of similar
action for Greece.
"Moody's is still lagging the other rating agencies, so a
bit of a catchup upgrade for Greece by about up to two notches
is very possible," said Rainer Guntermann, a strategist at
Commerzbank. "It won't come as a big shock to the market, but as
always with official confirmation some accounts may feel more
comfortable in adding to their positions (on Greek bonds)."
Italian 10-year yields were up 7 bps at 2.77
and the Spanish equivalents up 6 bps at 2.57 percent
before the U.S. jobs report, which may shed light
on when the Federal Reserve will end its ultra-easy,
risk-friendly monetary policy.
Due at 1230 GMT, the non-farm payrolls report was forecast
to show 233,000 jobs were added last month and the unemployment
rate held steady at 6.1 percent.
Some traders said the market was already positioned for a
strong figure and would need to see a big number - 250,000 and
above - for a durable upward move in U.S. Treasury yields.
The effect of potentially higher U.S. yields on euro zone
bonds should also be tempered by Thursday's report on inflation
in the region, which fell to its lowest in almost five years in
"If expectations for the Fed's gradual normalisation in
policy do indeed pan out, then there is, we feel, a strong
argument to suggest that not only will core euro yields remain
well bid, but that the higher-yielding peripheral market will
see even greater demand," Rabobank strategists said in a note.
"Yield hunters (will) look to a corner of the rates world
that is, for the time being, going to remain very much supported
by an ECB that is very much on a mission."
(Editing by Larry King)