Portuguese Bonds Gain as Investors Take Missed Payment in Stride

Portugal’s government bonds led gains in euro-area sovereign debt after its central bank chief told TV station TVI that Banco Espirito Santo SA can raise more capital as an associated company missed a payment.

Greek, Italian and Spanish bonds rose and Portugal sold 1.25 billion euros ($1.75 billion) of bills even after Rioforte Investments SA, a holding company in Espirito Santo group, failed to pay 847 million euros of short-term debt. Prime Minister Pedro Passos Coelho last week urged the group to negotiate with creditors “as soon as possible,” while ruling out the need for a government bailout. Germany’s bunds were little changed after it sold 10-year debt at a record-low yield.

“The market has begun to differentiate,” said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG in Frankfurt. “It’s treating it as an isolated credit story rather than a systemic risk. This makes sense after government statements that there won’t be a bailout. That should support sovereign debt.”

Portugal’s 10-year yield fell 10 basis points, or 0.10 percentage point, to 3.72 percent at 4:27 p.m. London time after climbing 28 basis points last week, the biggest weekly jump since September. The 5.65 percent security due February 2024 rose 0.830, or 8.30 euros per 1,000-euro face amount, to 115.320.

The yield on 10-year Greek debt slid four basis points to 6.24 percent. The rate on similar-maturity Italian debt declined three basis points to 2.82 percent, and that on Spain’s slipped five basis points to 2.66 percent.

‘Shareholders Interested’

“If some additional capital is necessary, because of risks that at this moment we’re not seeing, there are certainly shareholders interested in participating in a capital increase,” Bank of Portugal Governor Carlos Costa said in an interview with the nation’s TVI.

The flare-up in Portugal last week revived memories of its role in the euro-area crisis that pushed yields across the region’s high debt and deficit nations to euro-era records. That prompted European Central Bank President Mario Draghi’s 2012 pledge to safeguard the region’s monetary union with backstops which helped stanch the selloff. Even after the surge, Portugal’s 10-year yields are less than a quarter of their 2012 highs.

Yield Cap

Draghi said on July 3 that the ECB stands ready to embark on broad-based asset purchases if necessary to ward off deflation. Policy makers have cut the main refinancing and deposit rates, introduced targeted offerings of liquidity to banks and said officials will also start work on purchases of asset-backed securities.

“There’s still a lot more that the ECB are expected to do and certainly they are in a much more capable position to start activating real quantitative easing in the form of buying government bonds,” said Craig Veysey, London-based head of fixed income at Sanlam Private Investments Ltd., whose parent company manages assets of about 40 billion pounds ($68 billion). “Investors know that and it will likely cap bond yields from going significantly higher.”

Rioforte’s failure to pay threatened a merger of Portugal Telecom SPGS SA, to which it owes the money, and Oi SA of Brazil. The companies agreed to rescue the deal to create a trans-Atlantic carrier by giving Portugal Telecom a smaller stake in the enlarged company.

“If there is no systemic threat, then there is a bit of value in Portugal,” said Padhraic Garvey, head of developed-market debt strategy at ING Bank NV in London. “There’s been buying of Portugal. The Telecom merger has gone through, and it’s very easy to draw a parallel between the two.”

The yield on Germany’s 10-year bunds was at 1.20 percent. The nation allotted 4 billion euros of securities due May 2024 at an average yield of 1.20 percent today, the lowest on record and down from 1.39 percent at a previous auction in June.

Portugal’s government securities returned 14 percent this year through yesterday, the best-performing sovereign debt after Greece, which earned 26 percent, according to Bloomberg World Bond Indexes. Italy’s bonds gained 9 percent, Spain’s 9.2 percent and Germany’s 5.2 percent.

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