Portugal Leads Drop in Euro-Area Bonds on Espirito Santo Concern

Portuguese government bonds led a decline in the region’s higher-yielding sovereign securities as shares in the nation’s financial institutions dropped after some companies missed payments on short-term debt.

Portugal’s 10-year yield had the steepest increase in seven weeks after a bank unit of Espirito Santo Financial Group SA said yesterday there was a delay in payments on some short-term debt securities issued by a Luxembourg-based parent, Espirito Santo International.

“Reports about Espirito Santo are causing some trouble,” said Felix Herrmann, a research analyst at DZ Bank AG in Frankfurt. “We’re in the process of finding a new equilibrium for rates in the periphery. It seems like the process is going to be more volatile than previously thought. Liquidity is lower for Portuguese bonds and that makes them more vulnerable.”

In other peripheral markets for the euro, the yield premium investors demand to hold Spanish securities due in the next decade instead of German counterparts jumped to the widest in six weeks. Greek bonds slid as the country hired banks to sell securities.

Portugal’s 10-year yield surged 12 basis points, or 0.12 percentage point, to 3.77 percent at 17:22 p.m. London time, the biggest increase since May 19. The 5.65 percent security due in February 2024 declined 1.075, or 10.75 euros per 1,000-euro ($1,364) face amount, to 114.87.

Greek government bonds declined for a second day, pushing 10-year yields to as high as 6.18 percent, the most since June 6. Greece said it would sell three-year debt via banks, accessing international markets for the second time in three months.

Thawing Markets

Capital markets had begun thawing for even those countries that had been frozen out during the crisis. Today’s sale coincides with a decline in Portuguese securities that may rekindle concern that the region’s banks remain vulnerable after the sovereign debt crisis.

Greece sparked the crisis almost five years ago when it said its deficit was bigger than previously reported. Together with Ireland and Portugal, it required international bailouts.

The Bank of Portugal said in an e-mail it reaffirmed a July 3 comment that Banco Espirito Santo’s solvency situation is “solid,” having been significantly reinforced with a recent capital increase. The bank was the only one of the three biggest publicly traded Portuguese lenders that didn’t request state aid after the country received a European Union-led bailout in May 2011.

State Liabilities

“There is no hint in anything that I’ve read that the state will be required to assume liabilities -- that is the key consideration for the sovereign,” Ciaran O’Hagan, head of European rates strategy at Societe General SA in Paris, said via e-mail. “But obviously the authorities want to stem the loss of confidence.”

Italy’s 10-year bonds declined for a second day before the nation auctions debt in the next two days.

Italy’s 10-year yield rose four basis points to 2.88 percent, having climbed from a low of 2.694 percent set last month. The nation is due to auction bills tomorrow and sell as much as 7.5 billion euros of securities maturing between 2017 and 2030 on July 11. Spain is set to offer inflation-linked bonds tomorrow.

Spanish Yields

Spain’s 10-year yield rose three basis points to 2.75 percent. The yield spread to bunds reached 156 basis points, the most since May 26.

“Supply coming into the market is another factor that temporarily drives up spreads,” said Elwin de Groot, an economist at Rabobank in Utrecht, the Netherlands. “The longer-term issues haven’t been solved and there are still a couple of countries with significant deficits and these need to be reined in at some point. For the debt markets those factors remain a risk.”

Euro-area bonds returned 7.3 percent this year through yesterday, according to Bloomberg World Bond Indexes, including a 15 percent gain for Portuguese debt.

The German benchmark 10-year yield rose less than one basis point to 1.23 percent, the lowest since May 3, 2013. The nation auctioned two-year notes to yield 0.01 percent, the least since January 2013.

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