LONDON: Yields on Portuguese and Irish government bonds soared on Thursday as markets scaled back exposure to sovereign risk ahead of the long Easter weekend even while stocks rallied on strong corporate results.
Worries over a possible Greek debt restructuring were expected to keep pressure on rattled peripheral bond markets into next week, resulting in yields -- already at euro lifetime highs -- continuing to push higher.
Given the extreme levels already offered on Greek debt, with two-year yields at more than 23 percent, Portuguese and Irish bonds bore the brunt of market uncertainty.
"With what's happening in Greece and the expectations of restructuring, really the momentum behind that is so strong the risks are that Portugal and Ireland trend that way too," said Chris Scicluna, deputy head of economic research at Daiwa Capital Markets.
"It's difficult to see what might turn it around in the near term and even into mid-May."
Ten-year Portuguese bond yields rose above 10 percent for the first time since the launch of the euro, while two-year bond yields climbed by more than 100 basis points to 11.978 percent. Shorter-dated Irish yields rose by around 85 basis points while two-year Greek yields were up by around 25 bps.
"Investors are realising that they cannot stay safe with a few issuers, that the debt crisis is definitely not over and that we are going to get more (stress) with a timing that is very uncertain. Given the uncertainty they are trying to get rid of this paper as soon as they can," said Luca Cazzulani, strategist at Unicredit in Milan.
RESTRUCTURING WOES
Almost 85 percent of participants in a Reuters poll said Greece will have to restructure its debt, despite firm denials from Athens, although more than half said it would be at least a year before Greece acted.
Five-year Greek CDS prices show a 70 percent probability of default, based on a 43 percent recovery rate, according to Reuters calculations from Markit data.
Spanish 10-year debt outperformed after a successful bond sale on Wednesday eased fears of contagion, with yields falling for a third session.
Gary Jenkins, head of fixed income at Evolution Securities, said market psychology was key to Spain's fate.
"On past performance, investors have been right to sell first and ask questions later. You can argue fundamentally Spain is different and should be given an opportunity but we're dealing with crowd behaviour," he said.
France sold 8.47 billion euros of short-dated bonds on Thursday, drawing solid bids with investors keen to pick up triple-A rated paper.
"Even though French paper looks quite expensive on a cross country basis compared with the Netherlands or with Austria, the fact that markets are in a flight-to-quality mode was the key support for the auction," said Michael Leister, rate strategist at WestLB in Duesseldorf.
BUNDS LIFTED
The German Bund future, seen as a safe-haven for euro zone bond investors, climbed around half a point as peripheral sentiment deteriorated before settling 37 ticks higher at 122.31.
Core markets should come back into focus next week when euro area inflation estimates will gain attention from those looking to gauge how soon the European Central Bank will raise interest rates for a second time this year.
Two-year bond yields were 7 bps down at 1.765 percent, with 10-year yields 4 bps lower at 3.267 percent after the key 3.33 percent level -- the previous double-top on technical charts -- held on Wednesday.
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