LONDON: Portuguese bond yields shot higher on Wednesday on local news reports of a proposed debt restructuring by a holding company of the founding family of Banco Espirito Santo (BES), Portugal's largest listed bank.
Ten-year yields spiked nearly 30 basis points to hit a day's high of 3.96 percent, as one trader said some banks were urging the sovereign to delay plans for a debt sale expected in the coming days. The Portuguese Treasury declined to comment.
"There is a lot of reports about the creditors of this holding company having to be restructured ... and the market is jittery about the potential risk for the Portuguese financial sector," said Pablo Zaragoza, chief strategist at BBVA.
Luxembourg authorities said last month they had launched an investigation into Espirito Santo International, the Luxembourg-registered holding company of the family which founded BES, over alleged breaches of company law.
Portuguese business daily Diario Economico reported on Wednesday that ESI was set to propose to creditors an extension of the maturity of its debts. Separately, the Expresso weekly reported that clients holding debts of Espirito Santo family companies had received proposals to swap the debt for equity.
"It is having a knock-on effect on the government bonds market ... There's a CP (commercial paper) maturing and there are proposals to delay payments or paying ... equity instead," one trader said.
While Portuguese bonds were the worst performers on Wednesday, yields on other lower-rated euro zone bonds also rose. Greek 10-year bond yields climbed 16 basis points to a day's high of 6.19 percent.
GREEK SALE IMMINENT
Traders said investors were selling Greek bonds to make space in their portfolios for the country's second new issue since its default two years ago, tipped to be issued imminently.
Athens will open books to investors for a three-year bond later on Wednesday or on Thursday, two sources with knowledge of the matter told Reuters, a deal that will follow its sale of five-year debt back in April.
Issuing shorter-term debt will allow Greece to raise money more cheaply, with ministry sources reportedly hoping for an interest rate of under 3 percent. Strategists warn, however, that it could raise refinancing risks for a country whose economic and political situation is still fragile.
Market funding also remains more expensive than the official bailout aid Greece still receives. But the bond sale will help fill a funding gap of 12.6 billion euros the IMF predicts will open up next year, without the conditionality of bailout cash that has angered austerity-weary Greeks.
In order to receive the next 1 billion euro aid tranche, Greece has promised to sell off its biggest power producer PPC, a move that opposition parties and striking electricity workers have vowed to fight.
"There's a benefit beyond just the interest rate cost here - Greece is filling a financing gap and putting itself in a stronger negotiating position with the troika," RBS rates strategist Michael Michaelides said. The "troika" of international lenders comprises the European Commission, International Monetary Fund and European Central Bank.
Portugal and Ireland both built up cash buffers via markets ahead of their bailout exits, allowing them to pass up the offer of a precautionary credit line with similar conditionality.
The new bond is expected to be around the same size as the 3 billion euro five-year transaction with which Greece returned to markets in April. That deal drew more than 20 billion euros of interest from about 600 investors, many of whom are scrabbling for yield in an environment where loose central bank policy has pushed official interest rates to historic lows.
Yields on Irish 10-year bonds rose 8 bps to 2.37 percent, while Spain and Italy's rose 6 basis points to 2.78 and 2.90 percent respectively.
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