Portuguese Bonds Advance With Italy, Spain After Crimea’s Vote

By Lukanyo Mnyanda and Neal Armstrong  Mar 17, 2014 6:30 PM GMT+0200

Portugal’s government bonds rose as investors bet Crimea’s vote to leave Ukraine and join Russia won’t lead to serious conflict, boosting demand for the euro area’s higher-yielding assets.

Italian and Spanish securities also gained even as the U.S. and the European Union condemned the referendum and imposed sanctions on individuals in Russia. Greek bonds advanced as the nation was said to be approaching agreement with its creditors. German 10-year bunds, which rose last week by the most since September, declined. Portugal’s bonds have also been supported as the nation moves toward exiting a bailout program.

“Even though Western countries are not accepting results of the referendum, we are not heading into a serious conflict and this is calming risk aversion,” said Felix Herrmann, a research analyst at DZ Bank AG in Frankfurt. Portuguese bonds are also attractive because investors “still see there is a huge pickup compared to other peripheral countries such as Spain or Ireland,” he said.

Portugal’s 10-year yield fell seven basis points, or 0.07 percentage point, to 4.53 percent at 4:27 p.m. London time after declining to 4.31 percent on March 11, the lowest since April 2010. The 5.65 percent bond maturing in February 2024 gained 0.58, or 5.80 euros per 1,000-euro ($1,393) face amount, to 108.79.

The Stoxx Europe 600 Index of shares rose for the first time in four days, climbing 1.1 percent, while the Standard & Poor’s 500 Index (SPX) gained 1 percent.

Crimea Vote

In a plebiscite that the Ukrainian government, the EU and the U.S. consider illegal, about 97 percent of voters in the Black Sea peninsula backed leaving Ukraine to join Russia, preliminary results show.

The EU’s measures are “targeted sanctions against responsible Russians,” Danish Foreign Minister Martin Lidegaard said in a Twitter post after a meeting with his peers from the rest of the 28-nation bloc in Brussels. President Barack Obama imposed U.S. sanctions on seven top Russian government officials.

Concern Russia will annex Crimea sparked the worst diplomatic standoff since the Cold War and caused yield spreads on peripheral bonds over German bunds to widen last week.

“The weekend events in Ukraine and Russia were largely expected and the markets are calm,” said Ciaran O’Hagan, head of European rates strategy at Societe General SA in Paris.

Spreads Tighten

Investors are returning to the markets they shunned during the region’s sovereign-debt crisis, helping push the average yield to maturity on securities from Greece, Ireland, Italy, Portugal and Spain to euro-era lows last week, according to Bank of America Merrill Lynch indexes. Ireland, which exited its bailout program in December, raised 1 billion euros last week in its first bond auction since September 2010, while Portugal is due to end its 78 billion-euro rescue program in May.

The additional yield investors demand to hold Italy’s 10-year bonds over similar-maturity bunds narrowed five basis points today to 181 basis points. The spread widened nine basis points last week after tightening to 173 basis points on March 11, the least since June 2011.

The equivalent Spanish spread was four basis points tighter at 175 basis points after expanding eight basis points last week. It shrank to 165 basis points on March 10, the least since October 2010.

Italian Yields

Italy’s 10-year yields fell three basis points to 3.38 percent. Those on similar-maturity Spanish bonds declined two basis points to 3.32 percent. The Greek 10-year rate dropped 19 basis points to 7.04 percent.

Greece, which originally sparked Europe’s crisis, is “close” to an agreement with the European Commission, International Monetary Fund and European Central Bank on the completion of the latest review of its economic adjustment program, Finance Minister Yannis Stournaras said. An agreement is necessary for the troika to disburse the next tranche of Greece’s international aid loan.

Germany’s 10-year bund yield increased two basis points to 1.57 percent after falling 11 basis points last week, the most since the period ended Sept. 27. The rate dropped to 1.50 percent on March 14, the lowest since July 19.

A report showed euro-area inflation unexpectedly slowed in February, keeping pressure on the ECB to loosen monetary policy.

Inflation Rate

Consumer prices in the 18 nations that share the euro rose an annual 0.7 percent, down from 0.8 percent in January, the European Union’s statistics office in Luxembourg said. That’s below Eurostat’s initial estimate of 0.8 percent on Feb. 28. The rate has been below 1 percent for five months. The ECB aims to keep inflation just below 2 percent.

Portugal plans to buy back bonds due in October 2015 tomorrow. The indicative amount for the auction is subject to market conditions, the nation’s debt agency said in an e-mailed statement on March 14.

Volatility on German bonds was the highest in euro-area markets today, followed by those of Portugal and France, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.

Portuguese bonds returned 9.5 percent this year through March 14, according to Bloomberg World Bond Indexes. Italian securities gained 4.4 percent, Spain’s 5.2 percent, while German bonds earned 2.6 percent.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Neal Armstrong in London at narmstrong8@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Keith Jenkins, Nicholas Reynolds