Portugal’s Bonds Slide on Deficit Concern; Irish Securities Drop
Portuguese bonds fell, pushing 10-year yields to the highest level in almost six weeks, as a court’s opposition to ending labor contracts for some workers raised concern the nation will struggle to meet deficit targets.
Ireland’s 10-year yields climbed the most in almost 10 weeks after a measure of consumer confidence declined for a second month in August. Italian and Spanish bonds posted a second weekly loss as euro-area reports showed the unemployment rate stayed at a record high last month and inflation slowed more in August than economists forecast. German bunds advanced for the first week in a month.
“If you are a creditor of Portugal, that news doesn’t sound very good,” said Luca Jellinek, head of European rate strategy at Credit Agricole Corporate & Investment Bank in London. “It’s the third time the court turns down budget-saving measures but I don’t think ultimately it’s going to derail what’s going on in Portugal. It just makes it less efficient and harder to slim down the state.”
Portugal’s 10-year yield climbed 16 basis points, or 0.16 percentage point, to 6.73 percent at the 5 p.m. close of trading in London after rising to 6.79 percent, the highest level since July 22. The 4.95 percent bond due in October 2023 fell 1.04, or 10.40 euros per 1,000-euro ($1,321) face amount, to 87.18.
The nation’s Constitutional Court said late yesterday the government’s proposed plan to scrap contracts for some state workers was not constitutional.
“The Court has never said that the number of public administration workers cannot be reduced by ending labor contracts with just cause,” Court President Joaquim Sousa Ribeiro told reporters in Lisbon yesterday. “What it says is that it can’t be done in this way.”
Volatility in Portuguese bonds was the highest in euro-area markets followed by those of Ireland and Greece, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.
Irish bonds extended a third weekly decline as KBC Bank Ireland said its gauge of consumer confidence fell to 66.8 this month from 682. in July.
The 10-year yield climbed seven basis points to 4.18 percent, the biggest increase since June 24. The rate rose 19 basis points this week.
The securities of the euro area’s high debt and deficit nations have declined this week as concern the U.S. Federal Reserve is moving toward withdrawing stimulus and the threat of a U.S.-led military strike on Syria damped demand for higher-yielding assets.
The region’s jobless rate remained at 12.1 percent in July, the European Union’s statistics office in Luxembourg said. Consumer prices rose 1.3 percent in August from a year earlier after a 1.6 percent increase in July, the statistics office said in a preliminary estimate.
Italy’s 10-year yield rose three basis points to 4.40 percent, having climbed eight basis points this week. Spanish 10-year rates were little changed at 4.54 percent, leaving this week’s increase at eight basis points.
Inflation has been below the European Central Bank’s 2 percent ceiling for seven months. ECB President Mario Draghi said in July the central bank would keep interest rates at the present level or lower for an “extended period” based on a “subdued” inflation outlook.
German bunds advanced with Treasuries this week as investors weighed the prospects for U.S.-led military action against Syria.
France signaled it might act as the principal U.S. ally in a military strike. Hours after British lawmakers pulled the U.K. out of a mission to punish Syria’s use of chemical weapons, French President Francois Hollande said he still favors delivering a targeted blow, bypassing the United Nations Security Council if needed.
Ten-year bund yields were little changed today at 1.86 percent, having dropped eight basis points this week.
Barclays Plc raised its forecast for German 10-year yields, saying geopolitical factors will provide only temporary support for the securities. It now expects the yield to rise to 2.10 percent by Dec. 31 and to 2.50 percent by the end of the third quarter next year, the bank said in a note to clients yesterday.
Portuguese bonds returned 3.3 percent this year through yesterday, according to Bloomberg World Bond Indexes. Italy’s gained 3.7 percent, Spain’s earned 7.4 percent, while Germany’s lost 2.2 percent.