LONDON: Portuguese bond yields hit record lows on Monday as hopes for the European Central Bank's QE scheme cushioned most euro zone debt from the impact of the anti-austerity Syriza party sweeping to victory in Greece's election.
Greek yields shot higher after the result of the vote, but the ECB's decision last week to launch a roughly 1 trillion euro quantitative easing programme checked any wider contagion.
Syriza has said it will restructure Greece's massive debts and leader Alexis Tsipras promised after Sunday's poll that five years of "humiliation and suffering" imposed under its 240 million euro bailout were over.
His choice of the right-wing Independent Greeks, which also oppose the bailout terms, as a coalition partner, unsettled some investors, however, as it suggests a tough stance in talks with European Union and International Monetary Fund lenders.
The promise of ECB cash helped support other indebted euro zone country's bonds, with Portuguese 10-year yields falling 12 basis points to a new all-time low of 2.112 percent with Spanish and Italian yields also hovering around historic troughs.
German 10-year yields, the benchmark for euro zone borrowing costs, hit a record low of 0.299 percent before rebounding. They closed up 3 bps on the day at 0.35 percent.
The prospect of QE has given fresh legs to a 2-1/2-year bond rally that has dramatically shrunk euro zone borrowing costs.
"The positive implications of the ECB announcement on QE has provided a cushion and is likely to remain the dominant market force," said Maria Paola Toschi, global market strategist at J.P. Morgan Asset Management.
"That said, the sooner the new Greek coalition government is established and negotiations with the Troika can begin, the better for Greece, Europe and the markets." Greek three-year yields shot up nearly two full percentage points to over 12 percent, while 10-year yields rose 45 bps to 9.21 percent.
That kept the yield curve sharply inverted, a sign investors are worried they may not get all their money back. "A Syriza victory was expected but an anti-austerity coalition partner was not," RBS analysts said in a note.
"The Greek curve is quite inverted so already the market has got a lot (of risk) priced in," said Michael Michaelides, an interest rate strategist at the bank. Greece's lenders were quick to warn Syriza against ditching its bailout commitments.
IMF chief Christine Lagarde said Greece must respect euro zone rules while the ECB's Benoit Coeure said it must pay its debts. The ECB's sovereign bond purchases will only include junk-rated debt if the issuer is in an international financial assistance programme, putting Greece at risk of exclusion if Syriza tears up the country's agreement with its lenders.
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