(Corrects name of analyst in paragraph 8)
* Portugal outperforms as markets optimistic on political
* Bunds eases after China relaxes bank deposit rate controls
By Ana Nicolaci da Costa
LONDON, July 19 Portuguese government bonds
outpaced their euro zone peers on Friday, with investors
optimistic the three main political parties will reach a deal
over the weekend to keep the country's bailout programme on
Safe-haven German Bunds, meanwhile, briefly hit session lows
after China's central bank announced long-awaited interest rate
reforms in a move analysts expect will boost growth in the
world's second-largest economy.
Portugal's Social Democrats and their two partners in the
ruling coalition have given themselves until Sunday to conclude
crisis talks requested by the president. The centre-right ruling
coalition defeated a motion of no confidence in parliament on
Thursday, leaving investors optimistic.
"For now, I think the likelihood is that some form of
compromise will be achieved at the weekend and hence, on really
quite thin (volume), we are seeing another impressive
performance in Portugal today," said Richard McGuire, senior
fixed income strategist at Rabobank.
"At the moment, the yields at these levels have placed a
question mark over Portugal's ability to return to the market
but it has not closed the door to such an outcome."
Portuguese 10-year yields were 19 bps lower at
6.91 percent and five-year yields also 19 bps lower
at 6.65 percent.
German Bund futures hit a session low of 143.99
after China's central bank said it would gradually relax
controls on bank deposit rates. It was last 7 ticks lower at
"We have seen bond markets weakening on these headlines as
interest reforms are seen as a growth support for China," said
Norbert Aul, rate strategist at RBC Capital Markets.
"(It) isn't a substantial sell-off. As the Chinese central
bank indicated this is a gradual process, so I wouldn't read too
much into the immediate market reaction at this stage."
Elsewhere on the periphery, 10-year Spanish government bond
yields were flat at 4.64 percent and the Italian
equivalent down 1.7 bps at 4.41 percent.
Portugal's yield gap between 10- and five-year yields
remained close to its lowest in a year, suggesting investors
were still worried about the country's credit quality.
"The evident divisions as regards austerity between the two
ruling coalition partners are likely to come back to the fore
before too long," McGuire said, adding that the 2014 budget
draft, which has to be presented to parliament by October 15,
would likely highlight that rift.
(Editing by John Stonestreet)