* Portuguese 10-year bond yield hits euro-era high
* Peripheral yields off highs as traders cite ECB buying
* Periphery pressured on EFSF reform pessimism
* Bunds lifted by safe-haven flows as investors shun risk
By William James
LONDON, Feb 10 The European Central Bank stepped
in to buy Portuguese bonds on Thursday, traders said, after
yields on the country's debt hit euro-era highs on a perceived
lack of progress towards resolving the bloc's year-long crisis.
Portuguese 10-year bond yields soared to 7.656 percent,
topping the previous record set in November, as market patience
over the lack of a deal on reforms to tackle the debt crisis
Portugal is seen as the next euro zone country most
vulnerable to requiring a bailout after Greece and Ireland.
"A couple of sellers came in yesterday and now the market
wakes up this morning and thinks 'I'm long Portugal, yields are
at their record highs and there's been no resolution -- sell
it'," a trader said.
The move prompted the ECB to resume its programme of buying
debt to stabilise the euro zone's most fragile markets, traders
said. Portuguese yields fell back to 7.404 percent, only
slightly higher on the day.
Traders said the ECB mainly bought Portuguese bonds and not
in large amounts relative to purchases when the programme was
launched. The bank said on Monday it had bought 76.5 bilion
euros of bonds since May, but none in the last two weeks.
Yields on Portuguese debt have risen for six straight
sessions as disappointment over slow progress towards reform of
the euro zone rescue fund and the poor performance of its
newly-launched benchmark spooked investors.
"By all accounts the (EU) summit last week was pretty
acrimonious and there was a bit of finger pointing," said Alan
McQuaid, chief economist at Bloxham Stockbrokers.
"It adds to the impression there is not a unified front
within Europe and in times of uncertainty you're better off in
core rather than peripheral paper."
Graphic showing Portuguese bond yields above 7 percent
Graphic showing ECB bond purchases
The Portuguese 10-year government bond yield spread over
Germany widened to 440 bps, up more than 30 bps on the day
before reversing direction, falling back to 410 bps on the talk
of ECB buying.
Portuguese stocks .PSI20 fell 2.03 percent, far exceeding
a 0.8 percent drop on the pan-European FTSEurofirst 300
.FTEU3. The German Bund future FGBLc1 gained as a result of
the tension, rising as much as 65 ticks to 122.98.
Other peripheral bond yields also rose relative to German
debt on a building sense of unease in the periphery, despite
recovering ground as Portuguese spreads tightened.
Traders highlighted Portugal's five-year syndicated bond
sale this week as a sign of waning investor appetite to hold the
country's debt. The bond has traded poorly in the secondary
market, adding to worries over Portugal's ability to access the
market to raise the 18-20 billion euros it has targeted in 2011.
The indicative bid price on the bond PTOTEPOE0016=R
earlier fell as low as 97.29 -- well below the initial reoffer
price of 99.762, driving the yield above 7 percent and leaving
investors who bought the issue potentially holding paper at a
Peripheral euro zone debt had rallied in late January as
markets grew increasingly confident European Union leaders were
making progress on a deal to strengthen the European Financial
Stability Facility (EFSF), the euro zone bailout fund.
The 10-year German bond yield DE10YT=TWEB was 3.288
percent, down 2.1 bps while the two-year Schatz yield
DE2YT=TWEB was 0.7 bps lower at 1.449 percent.
(Additional reporting by Scott Barber, Nia Williams, Dominic
Lau and Emelia Sithole-Matarise; Editing by Susan Fenton)