Tags: Portugal | geopolitical | risk | bonds

Portuguese Bonds Decline on Reform Concern; German Bunds Rise

Friday, 30 August 2013 08:12 AM

Portuguese bonds fell, pushing 10-year yields to an almost six-week high, after a court opposed a plan to end labor contracts for some state workers, raising concern the nation will struggle to meet its deficit target.

Italian 10-year securities declined for the first time in three days after reports showed the euro-area unemployment rate stayed at a record high last month and inflation slowed more than analysts forecast in August. Benchmark German bunds rose for a second day after retail sales in Europe’s largest economy unexpectedly declined in July, spurring demand for safer assets.

“If you are a creditor of Portugal, that news doesn’t sound very good,” said Luca Jellinek, head of European rate strategy at Credit Agricole Corporate & Investment Bank in London. “It’s the third time the court turns down budget-saving measures. But I don’t think ultimately it’s going to derail what’s going on in Portugal. It just makes it less efficient and harder to slim down the state.”

Portugal’s 10-year yield climbed 20 basis points, or 0.2 percentage point, to 6.78 percent as of 12:03 p.m. London time after reaching 6.79 percent, the highest since July 22. The 4.95 percent security maturing in October 2023 fell 1.325, or 13.25 euros per 1,000-euro ($1,324) face amount, to 86.90.

Portugal’s Constitutional Court said yesterday it opposed a proposed measure on ending labor contracts of some state workers that’s part of a government plan to “requalify” some public sector employees.

‘Just Cause’

“The Court has never said that the number of public administration workers cannot be reduced by ending labor contracts with just cause,” Court President Joaquim Sousa Ribeiro told reporters in Lisbon yesterday. “What it says is that it can’t be done in this way.”

The jobless rate in the euro region remained at 12.1 percent, the European Union’s statistics office in Luxembourg said. Consumer prices in the 17-nation currency bloc rose 1.3 percent in August from a year earlier after a 1.6 percent gain in July, the statistics office said in a preliminary estimate. The median forecast in a Bloomberg survey of 38 economists was for a 1.4 percent increase.

Inflation has been below the European Central Bank’s 2 percent ceiling for seven months. ECB President Mario Draghi said in July that the Frankfurt-based central bank would keep interest rates at the present level or lower for an “extended period” based on a “subdued” inflation outlook.

Italian Yields

Italy’s 10-year yield rose two basis points to 4.39 percent. The extra yield investors demand to hold the bonds instead of similar-maturity German bunds widened two basis points to 254 basis points, the first increase in three days.

German retail sales declined 1.4 percent from June, when they fell a revised 0.8 percent, the Federal Statistics Office said. Economists predicted a gain of 0.6 percent, according to a Bloomberg survey.

Germany’s 10-year yield fell one basis point to 1.84 percent. The rate has decreased nine basis points this week.

Bunds advanced alongside Treasurys this week as investors weighed the prospects for U.S.-led military action against Syria. The yield on the Treasury 10-year note dropped four basis points this week, to 2.77 percent.

Barclays Plc raised its forecast for German 10-year bond yields, saying geopolitical factors will provide only temporary support for the securities. It now expects the yield to rise to 2.10 percent by the end of December and to 2.50 percent by the end of the third quarter next year, the bank said in an e-mailed note to clients yesterday.

Volatility in Portuguese bonds was the highest in euro-area markets followed by those of Finland and Ireland, according to measures of 10-year debt, the yield spread between two- and 10- year securities, and credit-default swaps.

Portuguese bonds returned 3.3 percent this year through yesterday, according to Bloomberg World Bond Indexes. Italy’s gained 3.7 percent, Spain’s earned 7.4 percent, while Germany’s lost 2.2 percent.

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Portuguese bonds fell, pushing 10-year yields to an almost six-week high, after a court opposed a plan to end labor contracts for some state workers, raising concern the nation will struggle to meet its deficit target.
Friday, 30 August 2013 08:12 AM
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