Portuguese Bonds Tumble Amid Political Upheaval as Bunds Rally

Portugal’s bonds fell, with 10-year securities set for the longest stretch of weekly declines since at least 1997, amid concern a political dispute will result in new elections and endanger the nation’s financial-aid program.

Ten-year Portuguese yields climbed toward the highest since November after the nation’s debt agency said it would sell bonds regularly should market conditions be conducive. German, French and Dutch bonds advanced after European Central Bank Executive Board member Vitor Constancio said euro-region monetary policy would stay accommodative. Ireland’s 10-year yields dropped the most in a week after Standard & Poor’s raised its outlook for the nation’s debt rating to positive.

“Portugal is being sold on the back of the political commentary,” said Marc Ostwald, a strategist at Monument Securities Ltd. in London. “There doesn’t seem to be a lot of common ground between the parties and with a small bond market like Portugal, the move gets exaggerated.”

Portuguese 10-year yields climbed 61 basis points, or 0.61 percentage point, to 7.51 percent at 4:54 p.m. London time, after rising to 8.11 percent on July 3, the highest level since Nov. 21. The rate has averaged 7.38 percent in the past year. The 4.95 percent security maturing in October 2023 fell 3.845, or 38.45 euros per 1,000-euro ($1,305) face amount, to 82.09. Two-year note yields rose 58 basis points to 5.78 percent.

Portugal will explore opportunities to do a bond exchange, the nation’s debt agency said today, reiterating plans set out earlier this year. The nation last year exchanged securities due in September 2013 for notes maturing in October 2015. It has started to pre-fund for 2014 borrowing needs, it said.

‘National Salvation’

Excessive friction among political parties doesn’t solve any of Portugal’s problems, Foreign Affairs Minister Paulo Portas told the nation’s parliament today. Elections in a hurry would be a mistake, he said.

President Anibal Cavaco Silva said this week that early elections would be undesirable and urged the ruling coalition parties and the main opposition to reach a “national salvation” pact allowing Portugal to complete its aid program.

The 10-year yield rose 38 basis points since July 5, its eighth-successive weekly increase.

There’s “a danger that Portugal is slipping into a bit of a negative spiral,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “At the same time, Portugal is still very highly regarded in terms of what they’ve tried to do.”

The cost of insuring Portuguese government debt rose to the highest since November today, with credit-default swaps on the nation rising as much as 75 basis points to 562 basis points, according to data compiled by Bloomberg.

German Bunds

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Germany’s 10-year yield fell six basis points to 1.56 percent and reached 1.54 percent, the lowest since June 19.

France’s 10-year yield declined four basis points to 2.19 percent and similar-maturity Dutch rates dropped six basis points to 1.97 percent.

The ECB’s forward guidance on interest rates has been “successful in stabilizing financial markets unduly affected by spillovers from the recent Fed announcement of future tapering of quantitative easing,” Constancio said in a speech in Singapore. “Europe is behind the U.S. in economic recovery and inflation risks which implies that monetary policy has to stay accommodative for a longer period.”

ECB President Mario Draghi pledged last week to keep interest rates low for an “extended period” in a bid to cap yields that threaten to stifle economic growth.

Irish Rating

“Central banks are giving a clear indication that stimulus will remain,” said Piet Lammens, head of research at KBC Bank NV in Brussels. “Policy will remain accommodative for a very long time and that is positive for bonds.”

Ireland’s bonds rose for the first time in three days after S&P said the economy is recovering and the government’s budget deficit may narrow faster than planned. The company kept Ireland’s credit rating at BBB+, the third-lowest investment grade ranking.

Ireland’s 10-year yield declined seven basis points to 3.90 percent, the biggest decline since July 2.

S&P’s outlook “shows that a decoupling process is in train in which Ireland is viewed more positively than other periphery countries,” Colin Bermingham, an economist at BNP Paribas SA in London, wrote in a note to clients. “The political instability in Portugal was barely transmitted to Irish debt.”

German bonds handed investors a loss of 1.1 percent this year through yesterday, according to Bloomberg World Bond Indexes. Italian securities gained 2.3 percent and Spain’s returned 5 percent. Portugal’s debt is little changed.

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