Portugal’s bonds slumped, pushing 10-year yields above 8 percent for the first time since November, on concern the resignation of two ministers will derail the government’s attempts to implement austerity measures.
Spanish and Italian (GBTPGR10) securities fell for a second day after Portuguese Prime Minister Pedro Passos Coelho told voters from Lisbon last night he’s trying to hold his government together. German 10-year bunds rose for a third day as investors sought safer assets and after a report showed euro-region services contracted in June more than economists forecast. Germany sold 3.36 billion euros ($4.37 billion) of five-year notes.
“Portugal is the main issue today and peripheral bonds are weaker,” said Rainer Guntermann, a rates strategist at Commerzbank AG in Frankfurt. “This could have implications for Portugal in that a return to the market could be delayed or much more difficult. In the long run, the risk is a further support package could be needed.”
Portugal’s 10-year yield jumped 74 basis points, or 0.74 percentage point, to 7.46 percent at 4:21 p.m. London time after climbing to 8.11 percent, the highest level since Nov. 21. The 4.95 percent bond due in October 2023 dropped 4.75, or 47.50 euros per 1,000-euro face amount, to 82.35.
Foreign Affairs Minister Paulo Portas, leader of junior coalition party CDS, quit yesterday in protest at the government’s budget policy. Finance chief Vitor Gaspar also stepped down this week, saying his credibility had been compromised by the government’s failure to meet fiscal targets set by the European Union.
Political uncertainty in Portugal is provoking a reaction throughout the Iberian peninsula, Citigroup Inc. strategists including Peter Goves wrote in an e-mailed note.
“The epicenter of market volatility is now 10-year Portuguese government bonds,” they wrote. “The full impact of the unfolding political events is unclear at this stage. Spain, like many markets, is a passenger in this event and yields have risen as a consequence.”
The extra yield investors demand to hold Portugal’s 10-year bonds instead of similar-maturity German bunds expanded 78 basis points to 5.80 percentage points after reaching 6.46 percentage points, the widest since Nov. 27.
Yields on Spanish 10-year bonds climbed 16 basis points to 4.78 percent and those on 10-year Italian debt increased eight basis points to 4.52 percent.
The bonds of the euro area’s peripheral nations have rallied during the past year after European Central Bank President Mario Draghi pledged to buy the securities of highly indebted member nations should they request it.
Spain’s 10-year yield has dropped almost 50 basis points since Jan. 1 and Portugal’s is less than half its euro-era record of 18.29 percent set in January 2012.
German bonds rose along with those of Austria and the Netherlands as investors sought out the region’s core government securities amid concern the debt crisis is worsening.
German 10-year yields fell four basis points to 1.67 percent. Similar-maturity Austrian yields dropped one basis point to 2.12 percent and those of the Netherlands declined two basis points to 2.08 percent.
An index (BGER) of services activity in the euro-area based on a survey of purchasing managers was 48.3 in June, less than the initial estimate of 48.6 announced on June 20, London-based Markit Economics said. A reading below 50 indicates contraction.
Germany sold notes maturing in April 2018 at an average yield of 0.63 percent, compared with 0.54 percent at the previous auction of five-year debt on June 5. The nation sold five-year notes at a record-low rate of 0.31 percent on Aug. 1.
Bonds slumped around the world last month after Federal Reserve Chairman Ben S. Bernanke said U.S. policy makers may start reducing debt purchases this year.
“We had a period where we were trading against a backdrop of liquidity risk, where all boats were sinking on the same tide,” said Richard McGuire, a senior fixed-income strategist at Rabobank International in London. “Today we have returned to fundamental risk, where what is good news for safe-haven assets is bad news for riskier assets. We don’t believe issues from the debt crisis ever really went away and the most acute problem right now is obviously Portugal.”
Volatility on Portuguese bonds was the highest among developed markets today, followed by those of Spain and Italy, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.
German securities handed investors a loss of 1.5 percent this year through yesterday, according to the Bloomberg Germany Sovereign Bond Index. Portuguese bonds returned 2.8 percent, while Spanish (GSPG10YR) bonds gained 6 percent, separate Bloomberg World Bond Indexes show.
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