Portuguese bonds fall while bank stocks increase

BOND MARKETS:PORTUGAL'S BONDS fell and its bank stocks rose yesterday as investors digested the long-expected news that the country has asked for a bailout.

At the same time, Irish bond yields continued to decline, signalling that the markets are taking comfort from the finality promised by last week’s banking stress tests.

The likelihood of Spain being forced into a bailout in Portugal’s wake also appeared to recede, although Spanish bonds fell a touch over all maturities.

The yield on Portuguese 10-year debt added six points to settle at 8.599 per cent as markets closed last night, comparing to a 3.42 per cent German yield over the same maturity. Portugal’s five-year debt yields rose by 17.7 basis points to 9.837 per cent, while two-year debt yields added 20.6 points to reach 9.075 per cent.

Meanwhile LCH.Clearnet, Europe’s biggest independent clearing house added a 15 per cent margin fee to investors betting on gains in Portuguese bonds, reflecting the country’s slide towards insolvency.

Portugal’s banks strengthened, however, as European stocks rallied in general before fading in the wake of Japan’s latest earthquake.

The boost saw Portugal’s Banco Espirito Santo and Banco Comercial Portugues surging by close to 5 per cent as investors eyed the probable funding support for the financial sector. This came after the country’s banks warned on Monday that they may stop buying Portugal’s debt, thus helping to precipitate bailout discussions.

Donal O’Mahony, global strategist with Davy, believes Ireland has now been “decoupled” from Portugal in investors’ minds, helped by the sense of closure from last week’s stress tests.

“We’re more than at the end; we’ve probably over-egged it,” he said of the Government’s policy on the banks, acknowledging, however, that difficulties remained in relation to the Irish economy’s potential to recover.

Brian Devine, NCB’s chief economist, also expects Spain to escape a bailout, mostly because its economy’s size should allow it to absorb its financial problems.