March 7, 2014 / 5:56 PM / in 4 years

Portuguese yields fall to mid-2010 lows

* Brighter economic outlook boosts peripheries

* Greece bucks trend as yields rise on credit gap concerns

* U.S. payrolls above expectations but Bunds flat on the day

By Joshua Franklin

LONDON, March 7 (Reuters) - Portuguese bond yields fell to near-four year lows on Friday as peripheral euro zone debt ended the week strongly, boosted by increasing confidence in the bloc’s recovery and investors’ search for higher returns.

Markit’s final Eurozone Composite Purchasing Managers’ Index earlier in the week showed euro zone private businesses enjoyed their fastest growth rate in over 2-1/2 years last month.

“The news flow is positive,” said RBS strategist Harvinder Sian. “This is a global growth story that’s very constructive. You saw the PMIs come in firmer.”

This helped push Portuguese yields 13 basis points lower to 4.59 percent, the lowest since May 2010.

Bucking the positive trend in the periphery, yields on 10-year Greek junk-rated bonds were up 19 bps at 6.86 percent, their first rise in four days.

Greece’s central bank said on Thursday the country’s major banks must raise an extra 6.4 billion euros ($8.9 billion) in capital to make themselves strong enough to deal with the fallout from future crises. Greece’s troika of international lenders estimate the shortfall will be even greater.

Spanish 10-year yields fell 7 bps to 3.37 percent while equivalent Italian yields were 4 bps down at 3.43 percent.

Yields on 10-year German Bunds rose as high as 1.68 percent before ending flat at 1.65 percent, and with top-rated bonds offering ultra-low returns, market participants see no let-up in the peripheral rally.

“Not just Germany, but the UK and U.S. markets don’t necessarily offer great risk/reward and so (investors) look to the kind of yields you can get in Spain and Italy,” said Andy Chaytor, head of European rate strategy at Nomura. “You’re still getting mid-3 percent and that’s pretty attractive.”

Across the Atlantic, U.S. employers added 175,000 jobs to their payrolls last month after creating 129,000 new positions in January, the Labor Department said on Friday. Economists polled by Reuters had expected non-farm payrolls to rise 149,000.

The upbeat figures helped to ease fears of an abrupt slowdown in growth in the world’s largest economy after unseasonably cold and snowy winter weather disrupted economic activity. It also supported the U.S. Federal Reserve’s stance of paring back its monetary stimulus.

The data weighed more on U.S. Treasury bonds, with their premium over Bunds hitting its highest since mid-2006 of 114 basis points.

“Is it a game-changer? No not really,” said RBS’ Sian. “The point here is that the Fed is steady as she goes.”

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