Portuguese Bonds Fall With Euro Peers, Extending Drop After Vote

  • Moody's says election outcome may hinder structural reforms
  • German factory orders add to negative economic sentiment

Portuguese bonds fell for a second day, extending their slide after weekend elections handed victory to Prime Minister Pedro Passos Coelho’s coalition without giving it a parliamentary majority.

The decline saw 10-year yields jump by the most in two weeks. The bonds had rallied in the eight trading days leading up to the Oct. 4 vote, sending yields to the lowest since May. The outcome of the election was “a little ambiguous,” Eurogroup chief Jeroen Dijsselbloem said on Monday before a meeting of finance ministers in Luxembourg. Spanish bonds also slid for a second day after last week’s rally.

“We’ve had a strong rally,” said Daniel Lenz, lead market strategist at DZ Bank AG in Frankfurt. “People realize coalition talks still need to take place in Portugal. Spain is still a hot-spot for political risk, so this profit-taking could be expected.”

Portugal’s 10-year yield rose five basis points, or 0.05 percentage point, to 2.36 percent as of 4:38 p.m. London time. The yield dipped to 2.26 percent on Monday, the lowest since May 5. The 2.875 percent bond due in October 2025 slipped 0.45, or 4.50 euros per 1,000-euro ($1,121) face amount, to 104.55.

The ruling coalition’s loss of a majority may complicate its ability to implement further structural reforms because it will have to rely on the opposition supporting key policies including changing public pensions, Moody’s Investors Service said in a report.

President Anibal Cavaco Silva will meet Coelho on Tuesday at 6 p.m. , a formal process in which all parties represented in parliament are granted a meeting before the appointment of a prime minister after an election.

German Bunds

Spain’s 10-year yield rose three basis points to 1.84 percent, after dropping to as low as 1.74 percent on Monday, also the lowest since May. Yields on benchmark German 10-year bonds climbed three basis points to 0.60 percent.

That pushed the yield premium Spanish debt offers over German securities to 124 basis points, after it narrowed on Monday to 122, the smallest gap since Aug. 3.

Bonds across the region have been supported by speculation that signs of slowing growth around the world will prompt the European Central Bank to extend its unprecedented stimulus program. A report Tuesday showed German factory orders unexpectedly fell in August in a further sign Europe’s largest economy is vulnerable to weaker growth in China and other emerging markets.

Holders of Portuguese bonds earned 1.3 percent in the past month through Monday, while investors in Spain’s debt gained 1.5 percent, according to Bloomberg World Bond Indexes. The average across the euro zone was 0.9 percent.

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