Portuguese yields soar above 8% as political crisis swirls

Wednesday 03 July 2013 18.37
10 year Portuguese government bond yields surge to over 8%
10 year Portuguese government bond yields surge to over 8%

Portuguese bond yields surged above 8% today as a government crisis prompted investors to shun the bailed-out country, raising concerns about a renewed bout of euro zone debt trauma.

Stocks on the Lisbon bourse fell sharply and the cost of insuring Portuguese bonds against default rose to the highest level since November.

The resignation earlier this week of two ministers threatened to force an election over continued budget austerity, risking Portugal's goal of exiting its €78 billion bailout by returning to regular bond markets next year.

Portugal's bond yields surged to levels near which it was forced to seek international aid two years ago.

Euro zone debt markets have been relatively calm since the European Central Bank announced last year that it would step onto markets under certain circumstances. Portugal, however, may not meet the criteria as it is not fully back in the bond market yet.

The sell-off extended to Italian and Spanish debt, but was less pronounced there. Investors favoured safety, securing demand at a German auction in line with this year's 1.9 bid-cover average.

Ten-year Portuguese yields surged at one point to 8.2% - their highest since November 2012 and were on track for their biggest daily rise since January 2012. They later fell back to 7.45%.

Portugal would have to be growing at a 7-8% annual rate to be able to afford servicing its debt at these yield levels in the long run, analysts said. The economy contracted 4% on an annual basis in the first quarter.

Ten-year Spanish and Italian borrowing costs rose sharply but held below 5%, while ten year Irish yields rose 8 basis points to 4.05%. Ireland is seen as on track to exit its bailout.

Analysts said the tamer reaction in Italian and Spanish debt, although significant, indicated support from domestic investors and continued faith in the European Central Bank's bond-buying programme.

Higher borrowing costs for a sustained period of time could hurt Portugal's chances of exiting its bailout without further support and could make markets more prone to testing the ECB's resolve.

Against this backdrop, investors will scour ECB President Mario Draghi's news conference after a monetary policy meeting tomorrow for reassurances that the ECB has the region's back.