Portugal's Bonds Outperform Rest of Euro Area After S&P Upgrade

Updated on
  • Euro-area bonds track Treasuries lower on hawkish Fed comments
  • Attention turns to Chinese output data due this week

Euro-area government bonds declined, with Spain’s 10-year securities falling for the first time in three days as a rally that pushed the nation’s yields to the lowest level in a month waned.

European sovereign securities followed Treasuries lower on Monday after Fed policy makers, including San Francisco Fed President John Williams, laid out the case for an interest-rate increase this year. That pared back Friday’s rally, in which benchmark German 10-year bund yields dropped by the most in more than two months, after the U.S. Federal Reserve kept its key interest rate at a record low.

“After the big rally in fixed income last week we are going the other way today given the more hawkish comments from the Fed,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. He said investors will be “trying to figure out what the Fed is going to do next” and so there will be a lot of focus on comments from policy makers and Chinese data which could signal if the world’s second largest economy is “hard-landing or not.”

Spanish 10-year bond yields rose five basis points, or 0.05 percentage point, to 2 percent at 4:23 p.m. London time. The yield reached 1.93 percent earlier on Monday, the lowest since Aug. 18. The 2.15 percent security due in October 2025 fell 0.5, or 5 euros per 1,000-euro ($1,119) face amount, to 101.375.

German 10-year bund yields increased two basis points to 0.68 percent after tumbling 12 basis points at the end of last week, the steepest decline since July 7. Similar-maturity Italian bond yields climbed four basis points to 1.80 percent, and those on Portuguese bonds rose six basis points to 2.58 percent. Treasury 10-year note yields jumped six basis points to 2.19 percent.

Chinese Uncertainty

In the press conference after the announcement on Sept. 17, Fed Chair Janet Yellen referred to investor concern over China and how global uncertainty and financial turmoil kept the U.S. central bank from raising interest rates. Danske’s von Mehren said an index of Chinese manufacturing due on Sept. 23 will also be closely watched by fixed-income markets.

“European bonds are caught between the Fed” which may still raise rates in December and Chinese data, von Mehren said. “There is uncertainty in China which is keeping the market from selling off.”