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Portuguese Bonds Drop With Italy’s as Global Turmoil Halts Rally

Portuguese government bonds fell for the first week since July 11 as financial turmoil deepened at Banco Espirito Santo SA and a selloff in stocks damped demand for higher-yielding assets.

Italian securities also declined with equities this week as Argentina missed a deadline to pay interest to bondholders, the European Union and U.S. ramped up sanctions against Russia and manufacturing data fell short of analyst estimates. Yields on Italy’s 10-year debt set a record low before the selloff took hold and bonds across the euro area rounded out a seventh straight month of gains in July.

“While Portugal’s fundamentals have improved, news of BES re-ignites concern about banking-sector risk in the region,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “Peripheral bonds have come a long way and some people are looking for an excuse to sell, especially against the backdrop of geopolitical risks and Argentina’s debt default.”

The Portuguese 10-year yield rose six basis points, or 0.06 percentage point, this week to 3.70 percent through the 5 p.m. London close yesterday. The 5.65 percent security due in February 2024 declined 0.56, or 5.60 euros per 1,000-euro ($1,343) face amount, to 115.385.

Italy’s 10-year bond yield climbed four basis points to 2.76 percent, after reaching a record low of 2.626 percent on July 30. The Stoxx Europe 600 Index of shares dropped 2.9 percent this week.

Flare Up

The flare-up in Portugal dented a rally that saw securities from euro area’s most-indebted nations to its highest-rated complete a gain in July, spurred on by subdued inflation and bets the European Central Bank will keep down borrowing costs to boost the economy. Banco Espirito Santo’s shares fell each day last week as it was ordered to raise capital following a 3.6 billion euros first-half net loss.

European governments may sell 14.6 billion euros of debt next week, compared with 11.5 billion euros this week, according to Royal Bank of Scotland Group Plc estimates.

“We expect the yield curve in the euro region to steepen as short-dated bond yields remain anchored,” said Salman Ahmed, a London-based global strategist for at Lombard Odier Investment Managers, which oversees $46 billion. “While longer-dated bond yields may rise due to global factors, short-dated bonds should remain well-supported because the ECB is unlikely to be able to raise rates any time soon.”

The yield on 10-year German bunds fell two basis points in the week at 1.13 percent. The rate touched a record-low 1.109 percent on July 29.

Portuguese government bonds returned 16 percent this year through July 31, according to Bloomberg World Bond Indexes. Italy’s gained 10 percent and Germany’s advanced 5.5 percent.

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