LONDON: Portugal's borrowing costs edged up on Monday after the country's supreme court rejected several austerity measures in the government's 2014 budget.
Ten-year yields opened 7 basis higher at 3.72 percent, before paring some of those losses with the broader debt market underpinned by expectations the European Central Bank will announce a stimulus package on Thursday.
"It's a disturbance to the market, a reminder that it is not so easy to get these countries back on track," said Luca Jellinek, European head of fixed income at Credit Agricole.
Portugal, which needs to sharply cut its budget deficit in coming years under European Union rules, has been forced to review its finances a number of times in the past years following interventions from its top court.
The latest ruling, announced after markets closed on Friday, creates an estimated fiscal gap of 700 million euros.
"This should not derail the fiscal adjustment process in Portugal but it has created a short-term hurdle that has to be overcome," said Pablo Zaragoza, chief strategist at BBVA.
"Investors could be using this as an excuse to book some profits after the recent outperformance."
Traders said this weakness in Portuguese bonds should be short-lived with the ECB poised to announce a number of policy measures at its June meeting on Thursday designed to protect the euro zone's fragile recovery.
Expectations the ECB will ease policy supported other euro zone government bond markets on Monday. Yields on Italian and Spanish 10-year bonds dipped 2 bps and 3 bps to 2.94 and 2.83 percent respectively, just above record lows. Irish equivalents dipped 5 bps to 2.57 percent, while Greek yields followed Portugal's higher, rising 3 bps to 6.30 percent amid ongoing concerns about the country's fragile ruling coalition.
BUY THE RUMOUR, SELL THE FACT
Euro zone manufacturing growth slowed more than initially thought last month, a business survey showed on Monday, keeping the onus on the ECB to intervene.
Weak inflation which was evident in readings from Germany's main states on Monday and was expected to filter through in country-wide data set to be released later in the day, was also seen as supporting ECB action. German 10-year yields dipped 1 bps to 1.30 percent, just above 12-month lows.
Italian Economy Minister Pier Carlo Padoan said on Saturday that deflation would be a disaster for the euro zone and for countries with high public debt in particular.
Euro zone inflation stood at just 0.7 percent in April, far below the European Central Bank's target of just below 2 percent, and a Reuters survey of analysts expects it to stay at that level when May data is released on Tuesday.
Measures expected to be announced by the ECB at its meeting on Thursday include an unprecedented cut in the central bank's deposit rate into negative territory and measures aimed at boosting lending to small and mid-sized firms. Confirmation of the measures could still lead to disappointment, though.
"The market has probably got this all factored in by now, so the main worry I have, having bought the rumour, is a 'sell the fact'," said a government bond broker.
BBVA's Zaragoza, however, argues that any disappointment from the ECB announcement will be short-lived as long as the possibility of a programme of asset purchases, known as quantitative easing, is kept on the table.
Comments
Comments are closed for this article.