Portugal Bonds Fall as Socialist Leader Proposes New Government

  • Yield rises after Costa proposes alternative to Coelho
  • Investors may see `slightly wider spreads': Toronto Dominion

Portuguese government bonds declined after Socialist opposition leader Antonio Costa said he can form a stable government backed by a majority in parliament, increasing investor uncertainty about who will lead the nation.

The decline saw yields on 10-year bonds rise for a second day Wednesday after Costa’s proposed an alternative to another term under Prime Minister Pedro Passos Coelho. Separately, the nation was warned by the European Commission over failing to submit a draft 2016 budget on time.

In the Oct. 4 elections, Coelho won most seats in the country’s first general election since 2011, though his ruling coalition fell short of the majority it had in the past four years. A rival Socialist-ledgovernment was also backed on Wednesday by Portuguese Communist Party leader Jeronimo de Sousa.

“It was clear from the initial election results that at most, the government would probably last one year as Coelho would likely have a hard time passing a budget,” said Richard Kelly, head of global strategy at Toronto Dominion Bank in London.

Even if the Socialists come to power, they “are only talking about narrowing the deficit more slowly and still meeting broad commitments,” Kelly said. “It might result in slightly wider spreads, but I wouldn’t expect anything significantly so.”

Portugal’s 10-year yield rose three basis points, or 0.03 percentage point, to 2.45 percent as of the 5 p.m. London close. The yield has risen from a five-month low of 2.26 percent reached on Oct. 5, a day after the elections. The 2.875 percent bond due in October 2025 slipped 0.255, or 2.55 euros per 1,000-euro ($1,137) face amount, to 103.735.

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