German Bonds Gain as Portugal Bank Woes Cast Shadow Over Markets

German government bonds rose, pushing 10-year yields to a 14-month low, as banking woes in Portugal raised concern that the euro area has yet to return to full financial health.

The gains combined with a fourth day of losses for 10-year Portuguese bonds to widen the yield spread between the two, a measure of risk perceptions, to the most since March. Greece’s five-year yields climbed as the country sold 1.5 billion-euros ($2 billion) of three-year notes at a greater cost than some analysts estimated. Italian 10-year bonds fell for a third day before the country auctions 7.5 billion euros of debt maturing between 2017 and 2030 tomorrow.

“At the moment the periphery remains exposed to a further limited setback,” said Patrick Jacq, a fixed-income strategist at BNP Paribas SA in Paris, referring to the region’s higher-yielding government bonds. “We have some declines in liquidity over the past few days. The less liquid markets are exposed to a limited sell off.”

Germany’s 10-year yield fell three basis points, or 0.03 percentage point, to 1.20 percent at 4:27 p.m. London time after reaching 1.17 percent, the lowest since May 3, 2013. The 1.5 percent bond due May 2024 rose 0.28, or 2.80 euros per 1,000-euro face amount, to 102.785.

Crisis Specter

Instability in Portugal’s banks has rekindled the specter of the sovereign-debt crisis two months after the nation exited a bailout program. Borrowing costs are almost 1 percentage point off an eight-year low reached in June after pledges by European Central Bank President Mario Draghi to safeguard the euro pushed down borrowing costs from a record-high 18.29 percent in 2012. Greek bonds led gains in euro-area government debt this year, according to Bank of America Merrill Lynch indexes.

Portugal’s 10-year yield rose 22 basis points to 3.99 percent after earlier rising above 4 percent for the first time since May 21. The spread with bunds climbed to as much as 284 basis points, the widest since March 19.

Espirito Santo Financial Group SA suspended its shares and listed bonds today due to its exposure to Espirito Santo International, which has missed a payment on its debts. That prompted central bank assurances that Banco Espirito Santo SA, which is 25 percent owned by the listed company, is protected.

Greek Sale

Greece sold the notes at an average yield of 3.5 percent, receiving offers of twice the amount sold, according to an e-mailed statement from the Athens-based Finance Ministry. Forecasts earlier this week from HSBC Holdings Plc and Royal Bank of Scotland Group Plc were for a rate of about 3 percent. The size was less than a 3 billion-euro estimate from RBS today.

The sale “looks quite weak” and is a “good reminder that it is not that easy to return to markets with a history like Greece has,” said Jan Von Gerich, a fixed-income strategist at Nordea Bank AB in Helsinki. “Demand has no doubt been affected also by the somewhat adverse market conditions due to what is going on in Portugal.”

The yield on Greece’s five-year notes surged 12 basis points to 4.35 percent after jumping 21 basis points over the past two days. The rate was 4.95 percent when the notes were issued in April.

Italian 10-year bond yields rose five basis points to 2.93 percent, up 12 basis points since the start of the week.

The rates on similar-maturity French and Belgian securities each fell to record lows of 1.60 percent.

Euro-area bonds returned 7.2 percent this year through yesterday, according to Bloomberg World Bond Indexes. Portuguese debt earned 15 percent and their Greek counterparts made 28 percent. German securities gained 4.9 percent.

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