December 20, 2017 / 9:16 AM / a year ago

Portuguese bond yields hit best level against Italy and Spain since Jan 2010

* Portuguese 10-year yields dip 9 bps below Italy’s

* Lack of political noise compares favourably with peers

* U.S. tax progress fails to move euro zone bonds

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Abhinav Ramnarayan

LONDON, Dec 20 (Reuters) - Portugal saw its borrowing costs briefly touch their best level since January 2010 against southern European peers on Wednesday, having weathered this week’s sell off in government debt better than many other euro zone countries.

With political noise surrounding Italy and Spain, the yield on Portugal’s 10-year benchmark bond dipped to 9 basis points below the Italian equivalent and was just 34 bps over Spain in early trade.

Though this triggered a bit of selling of the 10-year benchmark as the session wore on, it is still a significant landmark for a country that started the year paying a 200-250 basis points premium over its two counterparts to borrow from bond market investors.

“There is a switch between Italian and Portuguese bonds at the moment because you have this uncertainty over the Italian election in March,” said DZ Bank analyst Rene Albrecht.

“In Portugal on the other hand you have this left of centre government which made some remarkable progress in paying back loans and debt to international investors.”

Euro zone finance ministers have chosen Portugal’s Mario Centeno as the next president of the Eurogroup, a move that Albrecht said was a recognition from the EU of the progress Portugal has made.

Portugal saw its 10-year yields fall below Italy’s for the first time in years earlier this week following a two-notch upgrade from Fitch that could put the country’s debt back into many of the world’s major bond indices.

Italian yields on the other hand have risen sharply in the past week on reports of an upcoming election on March 4, with a hung parliament the most likely outcome.

Though Spain’s government debt has been relatively resilient ahead of a Catalonia vote on Thursday that many hope will resolve Spain’s worst political crisis in decades, it still lags Portugal in recent times.

Debt across the euro zone was hit hard on Tuesday in a sell off triggered by a rise in German borrowing plans for 2016 strong U.S. economic data, and expectations around a U.S. tax overhaul.

But Portugal weathered it better than most, rising 5 bps on Tuesday — yields move conversely with price — compared to 12 bps for Italy, 7 bps for Germany and 6 bps for Spain.

On Tuesday night, congressional Republicans hit a last-minute snag in their drive to pass the biggest U.S. tax overhaul in 30 years, requiring them to hold another vote on Wednesday.

U.S. Treasury yields had risen sharply overnight to a two-month high of 2.47 percent, but most of it appeared to be already priced into European markets.

Most high-grade bond yields were more or less flat on Wednesday; the yield on Germany’s 10-year government debt — the benchmark for the region — was unchanged at 0.375 percent.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

Reporting by Abhinav Ramnarayan Editing by Jeremy Gaunt.

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