Portugal’s Bonds Lead Gains as BES Bailout Seen as Isolated CaseNeal Armstrong and Lucy Meakin
Portugal’s government bonds led gains among the euro region’s higher-yielding securities after the nation’s central bank took control of Banco Espirito Santo SA, easing concern that the lender’s woes may spread.
Two-year yields fell to the lowest closing level on record after the Bank of Portugal announced a 4.9 billion-euro ($6.6 billion) bailout that will leave junior bondholders with losses. Spanish and Italian securities rose, outperforming German bunds, as investor confidence that euro-area governments are able to contain problems in the financial industry helped boost demand for higher-yielding assets.
“The decision taken over the weekend has offered Portuguese bonds some room to recover and has led to some rebound in all the peripherals,” said Patrick Jacq, a fixed-income strategist at BNP Paribas SA in Paris. “It is offering further evidence that now when a private business is in trouble, governments are not impacted. This is supportive for government paper. The environment is favorable for carry trades and tighter spreads.”
Portugal’s 10-year yields fell eight basis points, or 0.08 percentage point, to 3.62 percent at 4:12 p.m. London time. The 5.65 percent bond due in February 2024 rose 0.705, or 7.05 euros per 1,000-euro face amount, to 116.09. Two-year rates dropped seven basis points to 0.66 percent, the least on a closing basis since Bloomberg began compiling the data in 1996.
Portuguese 10-year rates climbed to 4.02 percent on July 10, the highest since May 21, after companies linked to Banco Espirito missed payments on commercial paper. The bank’s financial woes threatened to sour investment sentiment toward assets that have been buoyed this year after the nation exited a 78 billion-euro rescue package from the European Union and the International Monetary Fund in May.
While Banco Espirito Santo’s problems revived memories of the euro-area financial crisis that caused investors to shun the region’s higher debt and deficit nations, yields have remained contained. The average yield to maturity on bonds from Greece, Ireland, Italy, Portugal and Spain was at 1.91 percent on Aug. 1, down from a peak of 9.55 percent in November 2011, according to Bank of America Merrill Lynch Indexes.
“We’re seeing this as an idiosyncratic event,” Nicola Marinelli, who helps manage around $190 million of assets at Sturgeon Capital Ltd. in London, referring to the bailout. He spoke in an interview on Bloomberg Television’s “On The Move” with Jonathan Ferro. “If it spreads then yes, we could see definitely a spillover into the government bonds of peripheral countries, but that’s not the case so far.”
Spain’s 10-year yield fell six basis points to 2.50 percent today and Italy’s decreased six basis points to 2.70 percent. Benchmark German bonds were little changed, with the 10-year yield at 1.13 percent after dropping to 1.109 percent on July 29, the lowest on record.
The Bank of Portugal’s Resolution Fund will move Banco Espirito Santo’s deposit-taking operations and most of its assets to a new company, Novo Banco, which it will own outright.
“We would interpret this restructure plan as a positive for Portugal while cautioning that there could be some noise around how the stake in the bank is accounted for on Portugal’s balance sheet,” Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London, wrote in an e-mailed note.
Portuguese securities earned 16 percent this year through Aug. 1, according to Bloomberg World Bond Indexes. Spain’s returned 10 percent, Italy’s 9.7 percent and Germany’s gained 5.7 percent.