Portugal’s Yields Jump Most in 14 Years as Rating Cut to Junk

http://www.bloomberg.com/news/2011-07-09/portugal-s-yields-jump-most-in-14-years-as-rating-cut-to-junk.html

Portuguese bond yields posted their biggest weekly gain in more than 14 years after the nation’s credit rating was cut to junk by Moody’s Investors Service, reigniting concern the euro-region debt crisis is spreading.

Italian and Spanish bonds dropped while German bunds gained for the fourth week in five as European officials remained at loggerheads over the best way to solve the crisis and prevent Greece from a disorderly default. Dutch Finance Minister Jan Kees de Jager said private investors may have to be forced into contributing to a new aid package for Greece. The European Central Bank raised its benchmark interest rate by 25 basis points to 1.50 percent on July 7.

“The downgrade of Portugal triggered spread-widening in peripheral debt,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “Portuguese bonds will be dropped out of some indexes, which will lead to some forced selling. There’s been a spill-over impact on Spain and Italy as well, and that’s being compounded by the supply coming up next week in a challenging environment.”

Portugal’s two-year note yield climbed 453 basis points over the week to 17.50 percent as of 4:55 p.m. in London yesterday. That’s the biggest weekly increase since at least April 1996, when Bloomberg began collecting the data. The yield reached a euro-era record of 18.28 percent on July 7. The nation’s 10-year yields climbed 199 basis points, the biggest weekly advance since at least 1997.

Italian Bonds Fall

Portugal’s 10-year yield spread over benchmark government bunds widened to a record 1,013 basis points on July 6, a day after the nation’s credit rating was cut. The long-term government bond ratings were lowered to Ba2, or junk, with a negative outlook, from Baa1, Moody’s said, citing concern the country will need to follow Greece in seeking a second bailout.

Italy’s bonds sank, pushing the 10-year yield up 40 basis points to 5.27 percent, the most since 2002, as the nation’s bank stocks tumbled even as Bank of Italy Governor Mario Draghi said he’s certain the lenders will pass stress tests.

The German-Italian 10-year yield spread touched 247 basis points, the most since at least January 2010.

Italy’s bonds may decline next week as the nation sells securities maturing in 2016, 2017, 2023 and 2026. Greece plans to auction 1.25 billion euros of 26-week Treasury bills on July 12, according to the Athens-based Public Debt Management Agency. Greece plans to sell Treasury bills.

German government bonds have handed investors a gain of 0.5 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg, while Italian bonds have returned 0.1 percent. Greece’s debt has dropped 17 percent and Portugal’s has declined 28 percent, the indexes show.