Portuguese bond yields fell today after Lisbon secured a €78 billion bailout, but market relief was limited with key details yet to be confirmed and lingering risks to the deal.
Portugal said late last night that a three-year package from the European Union and International Monetary Fund had been agreed to shore up the heavily-indebted country's finances. It is the third euro zone country to seek a bailout after Greece and Ireland.
Yields fell across the Portuguese curve at the market open, tightening the 10-year spread over German Bunds by around 18 basis points to 677 bps.
The cost of insuring Portuguese sovereign debt against default fell, with five-year credit default swaps down 25 bps at 620 bps, according to data monitor Markit. This means it costs 620,000 euros to protect €10 million of exposure to Portuguese bonds.
The limited scale of the rally - 10-year Portuguese yields remain above 10 per cent - showed investors were cautious, with the bailout still subject to cross-party approval in Portugal, and lingering question marks over whether objections from within Finland could stall the deal.
In an immediate test of investors sentiment Portugal will sell short-term debt worth up to €1 billion later in the session. Demand is expected to be lifted by the bailout agreement.
Yields rose across the German curve as demand for core debt dipped ahead of tomorrow's European Central Bank meeting.
Two-year debt came under the heaviest pressure, flattening the curve on fears that a hawkish tone would signal the next rise in interest rates would come in June instead of July.
Money markets are split over whether to price in an interest rate rise in June, as strong expectations seen after the ECB's April meeting have faded due to a strengthening euro and uncertainty surrounding talk of a Greek debt restructuring.
The 10-year German bond yield was 2 bps higher at 3.293 per cent, while the two-year yield was 4.2 bps up at 1.91 perc ent. The two/10-year bond yield spread was last at 138 bps, matching its tightest since January 2009.
