Portugal yields settle after smooth auction, no sign of Greek spillover

LONDON: Portuguese yields shook off an early rise on Wednesday after a smooth debt sale showed Lisbon was insulated, at least for now, from the Greek market turmoil triggered by the new government's anti-bailout stance. Portugal sold 1.25 billion euros in 10-year bonds at record low auction yields.

Investor demand was almost double the amount sold. As the standoff between Greece's Syriza-led government and European institutions developed last week, Portuguese yields rose almost half a percentage point off their record lows.

But part of that move was also due to investors selling to make room in their books for the new bonds.

The rise in yields was enough to catch the eye of yield hunters who expect next month's launch of a European Central Bank QE programme to buy around 1 trillion euros of government bonds to nail borrowing costs across the bloc to the floor.

While the new Greek government's reversal of measures agreed with the European Union and the International Monetary Fund as part of its bailout has hammered the markets in Athens, the impact has so far been contained.

In contrast, Portugal has shown it has good access to the markets after successfully completing its own bailout and plans to pay IMF loans back early.

"Portugal did a great job decoupling itself from Greece," said Jean-Francois Robin, head of rates strategy at Natixis.

"The macroeconomic situation, the debt sustainability in Portugal doesn't deserve comparison with Greece.

If you add to that quantitative easing from the ECB then you see Portugal is in a different league than Greece."

Portuguese 10-year yields were flat on the day at 2.57 percent, having traded as high as 2.60 percent just before the auction. Spanish and Italian equivalents were a fraction higher on the day.

The Greek market remained out on its own, with 10-year yields up 35 basis points at 10.95 percent and three-year yields up 130 bps at 21 percent.

Greek Finance Minister Yanis Varoufakis will outline to euro zone finance ministers on Wednesday demands for an end to austerity and a renegotiation of Greece's debts to its European partners.

But the chair of the meeting, Eurogroup head Jeroen Dijsselbloem, said there is likely to be no conclusion to discussions.

"We weren't really expecting any big news from this meeting because the current positions remain quite distant, and this is probably just the start of negotiations," said Paolo Batori, global head of emerging market fixed income strategy at Morgan Stanley.

"It looks like we are going to have a few reiterations before we can achieve an agreement." German Bund yields, the benchmark for the euro zone, were 1 bps lower at 0.36 percent.