LONDON: Portuguese bond yields fell on Thursday as polls predicted an election victory for the ruling coalition and the country said it was on track to meet this year's budget deficit target.
Portugal outperformed all the large euro zone debt markets, where yields were little changed. Polls showed the ruling alliance between Portugal's Social Democrats and the CDS-PP was leading the opposition before a general election on Oct. 4.
That suggests political continuity for the country, which has been praised for its reform efforts.
"The latest polls are quite surprising. The data in the last week have pointed surprisingly to a much stronger outcome for the current government," said Christian Lenk, a rate strategist at DZ Bank.
"This is really a strong driver."
There was still little prospect of a majority government and some in the market remain concerned that a hung government might undermine Lisbon's economic recovery.
Portuguese 10-year bond yields were down 5 basis points at 2.56 percent, having risen in recent weeks due to the political uncertainty.
The country also said it plans to offer 5- and 10-year variable rate bonds for retail investors.
That may mean less issuance that needs to be absorbed by institutional investors, which helped to push yields lower.
Portugal on Wednesday revised its 2014 budget deficit up to 7.2 percent of GDP, from a previously reported 4.5 percent after including the cost of rescuing a major bank, but said it was on track to meet this year's 2.7 percent target. Ratings agency Moody's said any upgrade of Portugal's credit ratings would depend on whether Lisbon keeps up the pace of fiscal consolidation after the election.
MAINSTREAM BATTLE
Citi strategists recommended investors bet on Portuguese bonds outperforming their Spanish equivalents based on the disproportionate risks presented by elections in each country.
Regional elections in Catalonia on Sunday may strengthen the stance of secessionists and foster political instability. National elections in December might see a strong result for anti-austerity parties.
On the other hand, in Portugal, Citi strategists see "a mainstream political battle", with the two main parties having advocated for continued fiscal consolidation.
The bank expresses this view as a bet that Portugal's 5/10-year yield curve will flatten while Spain's will steepen, with longer-dated debt issued by Madrid underperforming.
Spanish 10-year bond yields were up 2 basis points at 1.99 percent.
German Bund yields dipped to a one-month low of 0.57 percent before closing the day at 0.59 percent. Business morale in Europe's economic powerhouse unexpectedly improved in September, the Ifo think-tank's index showed on Thursday.
The strongest figure since May, the index rose to 108.5 in September from an upwardly revised 108.4 in August, beating the Reuters forecast of 108.0.
The data had little market impact, as traders waited for a speech on inflation from Federal Reserve chief Janet Yellen later in the day. US durable goods and jobless claims data were in line with expectations.
The European Central Bank offered banks 15.5 billion euros in its fifth targeted longer-term refinancing operation (TLTRO) on Thursday.
The liquidity tenders are aimed at improving lending to businesses and consumers.
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