July 16, 2014 / 8:30 AM / in 4 years

Portuguese yields fall as market more optimistic on BES

LONDON, July 16 (Reuters) - Portuguese bond yields fell on Wednesday, with investors more optimistic that the country’s largest listed bank can deal with the financial troubles faced by its founding family, although uncertainty remained high.

Rioforte, which indirectly owns a stake in Banco Espirito Santo, was preparing to file for creditor protection in Luxembourg, where it is based. The news hurt Portuguese government debt in early trade, but the bonds recovered later as the stock market opened and BES shares rose.

The bank’s shares have been recovering since late on Tuesday, when its chief executive said it was well capitalised and investor appetite for riskier assets picked up on the back of strong earnings from U.S. banks and dovish comments from Fed chief Janet Yellen.

Portuguese 10-year government bond yields fell 10 basis points to 3.74 percent. They have regularly seen daily swings of more than 10 bps over the past week, having briefly broken above 4 percent in the process.

“It’s a complicated set-up at the bank and Portuguese government bonds have been a victim of the BES case,” said Rainer Guntermann, rate strategist at Commerzbank.

“But we’re probably moving on to a phase in which the market thinks it doesn’t necessarily have to lead to a spillover into the government bond market or other markets.”

The government and the central bank have repeatedly said that BES is able to deal with any exposure to the troubled companies of its founding family as it has 2.1 billion euros in capital above the minimum regulatory requirements.

The Portuguese government also has a residual 6 billion euros from its rescue programme available for its banking sector if needed and the Treasury has built a financial buffer, having already raised some of the funds it will need for next year.

“The market is more upbeat that BES is not doing so badly and they can even raise more capital if necessary,” one trader said. “It looks more and more like an idiosyncratic risk.”

Most other euro zone yields fell, as Federal Reserve Chair Janet Yellen’s testimony before a Senate committee on Tuesday maintained expectations of ultra-low interest rates for the foreseeable future.

Better-than-expected Chinese growth figures also spurred appetite for high-yielding assets.

Germany sells 10-year Bunds later in the day. (Reporting by Marius Zaharia)

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