Portuguese Yields Jump on Bailout; German Bunds Decline Before ECB Verdict

Portuguese bonds dropped and German 10-year government debt yields reached a 20-month high after the Iberian nation sought a bailout and investors bet the European Central Bank will raise interest rates today.

Portuguese yields increased after Prime Minister Jose Socrates said he tried “everything” before requesting financial aid from the European Union. All 57 economists surveyed by Bloomberg expect the ECB to boost the main refinancing rate by 25 basis points. Spanish bonds stayed lower after the nation sold three-year notes.

“If you look where the other markets are trading that are under bailout already, it was to be expected” that Portuguese yields would rise, said Peter Schaffrik, head of European fixed- income strategy at RBC Capital Markets in London. “No one really knows what the end game is.”

Portuguese 10-year yields rose four basis points to 8.58 percent as of 11:20 a.m. in London. They reached 8.80 percent yesterday, the highest since the euro was introduced in 1999. The 3.85 percent security due April 2021 fell 0.195, or 1.95 euros per 1,000-euro ($1,429) face amount, to 69.075. Two-year yields climbed one basis point, to 8.88 percent.

The cost of insuring Portuguese sovereign debt fell 4 basis points to 550, CMA prices for credit-default swaps show. LCH Clearnet Ltd., Europe’s largest clearing house, said it will impose an extra 15 percent deposit charge for clients buying Portuguese government bonds.

Germany’s 10-year yield rose one basis point to 3.44 percent, after reaching 3.46 percent, the highest since Aug. 13, 2009. Yields on two-year notes were little changed at 1.84 percent.

Industrial Production

German industrial production rose three times as much as economists forecast in February, adding to signs economic growth accelerated in the first quarter.

Output increased 1.6 percent from January, when it gained 2 percent, the Economy Ministry in Berlin said today. Economists had forecast a 0.5 percent gain for February, according to a Bloomberg News survey. In the year, production rose 14.8 percent when adjusted for working days.

ECB President Jean-Claude Trichet said on March 3 that the key rate may be raised from a record low of 1 percent.

“The market is now positioning in front of the ECB meeting,” said Michael Markovic, a senior fixed-income strategist at Credit Suisse Group AG in Zurich. Portugal’s aid request “means they will not rely any more on short-term funding, which opens the door for the ECB to raise rates.”

Spanish, French Auctions

Spanish 10-year government bond yields rose one basis point to 5.25 percent. The spread over bunds was little changed at 181 basis points.

The nation sold 4.13 billion euros ($5.9 billion) of three- year notes at an average yield of 3.568 percent compared with 3.592 percent at an auction of similar-maturity debt in March, the Bank of Spain said.

Finance Minister Elena Salgado earlier said she “absolutely rules out” contagion from Portugal as “markets absolutely distinguish between the two countries.”

“The decoupling of Italy and Spain that has developed since February should receive further momentum on the back of the Portuguese bailout,” Michael Leister, a fixed-income analyst at WestLB AG in Dusseldorf, wrote today in an e-mailed note. “A major layer of uncertainty is now cleared, which should result in a further reduction in spill-over effects.”

‘Credible’ Stress Tests

The difference in yield, or spread, between French 10-year debt and equivalent German securities narrowed to 31 basis points, the least since Sept. 13, as France sold about 9.45 billion euros ($13.5 billion) of securities maturing in 2020, 2023, 2026 and 2041 today.

The benchmark Greek 10-year yield was little changed at 12.71 percent and Irish bonds gained, pushing the yield 24 basis points lower to 9.13 percent.

Irish bonds gained for a fifth straight day, pushing the 10-year yield 20 basis points lower to 9.16 percent.

Investors should buy Irish sovereign risk after bank stress tests last week proved “credible,” moving the focus to the country’s economy, Morgan Stanley said on April 4.

The nation’s financial regulator, Matthew Elderfield, yesterday said the government will only seek to share losses with Anglo Irish Bank Corp.’s senior bondholders if more capital is needed. He ruled out forcing losses on Bank of Ireland Plc, Allied Irish Banks Plc, EBS Building Society, and Irish Life & Permanent Plc’s senior bondholders.

“There are a number of reasons why Ireland might be a bit different,” Schaffrik said. “There’s some positive reaction coming from the stress test. But you have to be extremely careful about reading too much into individual moves” because the market liquidity is low, he said.

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net.

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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