March 10, 2014 / 5:51 PM / in 4 years

Portuguese yields fall as prospects of bailout exit brighten

* Portuguese yields hit lowest since April 2010

* Hunt for yield leads investors to euro zone peripherals

* Details of first post-bailout Irish auction lifts mood

By Joshua Franklin

LONDON, March 10 (Reuters) - Portuguese bond yields fell sharply on Monday to near four-year lows on increasing optimism the country could follow Ireland out of its international bailout programme later this year.

Portugal’s economy is expected to grow 1.2 percent this year and last month passed the penultimate review of its fiscal and economic performance under an EU/IMF bailout.

Lisbon hopes to follow Dublin’s example. Ireland formally left its programme in December, becoming the first euro zone country to do so.

“In some European circles, they are warming up to the idea of Portugal trying to do like Ireland, i.e trying to get free from any support, plan which obviously would be good news for investors because that implies a lower degree of subordination,” said Vincent Chaigneau, head of fixed income and forex strategy at Societe Generale.

Portuguese bond yields fell 12 basis points to 4.48 percent, their lowest since April 2010.

Adding to the positive sentiment among lower-rated euro zone members, Ireland’s debt agency said it would seek to raise 1 billion euros in an auction of 10-year bonds on Thursday. Dublin had said in February it would resume regular bond auctions this month.

Irish yields finished the day almost flat at 3.09, having earlier risen to 3.14 percent as investors made room on their books for the new bonds.

Investor appetite for higher returns following the European Central Bank’s decision to leave interest rates on hold helped Spanish and Italian yields lower, with the former down 5.6 bps at fresh eight-year lows of 3.31 percent.

“In such an environment of low rates for longer and low volatility...having these (periphery) bonds in your portfolio in order to get some extra yield pick-up is very attractive,” said BNP Paribas rate strategist Ioannis Sokos.

Data showing Italian industrial production rebounded more than expected in January also helped investor sentiment towards Italy, whose 10-year yields fell 5.2 bps to 3.37 percent, equalling Thursday’s eight-year lows

Yields on low-risk German Bunds fell by 2.3 bps on the day to 1.63 percent. Traders cited increased concerns over unrest in Ukraine, where unidentified armed men fired in the air as they moved into a Ukrainian naval post in Crimea.

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