LONDON: Portuguese bond yields rose on Monday after the opposition Socialists pledged to topple the government in a no-confidence vote, with political instability seen as potential setback in Lisbon's path to economic recovery.
Expectations that the ECB may roll out new stimulus measures in December pushed yields lower across the euro zone, but the move could not be sustained in Portugal, where the Socialists said the president had created "an unnecessary political crisis" by nominating Pedro Passos Coelho as prime minister.
Passos Coelho was named prime minister on Thursday after his centre-right coalition won the most votes in the national election but lost its majority in parliament, which swung to leftist parties.
The Socialists, led by Antonio Costa, have been trying to form their own coalition government with the hard left Communists and Left Bloc, both of which want to end the centre-right's austerity policies. Ten-year Portuguese yields were up 8 basis points at 2.46 percent as most euro zone yields eased a little.
"The uncertainty whether the proposed minority government will be tolerated by the parliament had a negative impact on the country's bonds," Bayerische Landesbank senior analyst, Alexander Aldinger, said.
Yields in Spain and Italy held near their lowest in half a year.
In Germany, the Bund showed it was still struggling to break below 0.50 percent, which has been the lower boundary of a 15 basis points range for the past two months.
"The reason why Bund yields are not falling as much as the others is the major sell-off in spring.
It is a psychological barrier for investors," DZ Bank market strategist, Felix Herrmann, said.
Bund yields hit a record low 0.05 percent in April, just over a month after the ECB began its trillion-euro quantitative easing (QE) programme.
Most in the market were betting they would turn negative.
But when a tiny uptick in inflation surprised the market, some investors took profits.
An initial minor rise in yields snowballed into a widespread sell-off; the bond coupons were not enough to compensate for the loss in face value.
Many investors suffered double-digit percent capital losses on their Bund investments in May.
Traders now say investors are generally reducing their Bund positions when yields approach 0.50 percent.
Bunds are generally seen benefiting less than other euro zone bonds from any additional ECB bond-buying stimulus.
"I am not sure if for Bund yields it would make any difference, because more QE is bullish but at the same time you have a very positive reaction in the risk space and that tends to be bearish (for Bunds)," Societe Generale global head of rates and FX strategy, Vincent Chaigneau, said.
Traders say the ECB is likely to extend or increase its bond-buying programme in December, a Reuters poll found, while another cut to an already negative deposit rate may come but not any time soon.
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