Portugal, Spain Government Notes Fall as Trichet Comments Provide no Balm

Government notes from Europe’s most- indebted nations declined as European Central Bank measures to accommodate recently-downgraded Portuguese bonds failed to alleviate concern the debt crisis is spreading.
Yields on Portuguese and Irish two-year notes rose to records even after ECB President Jean-Claude Trichet said in Frankfurt today that policy makers “decided to suspend the application of the minimum credit-rating threshold” for Portugal. German bunds slid after the central bank raised borrowing costs and Trichet said monetary policy in the euro region remains “accommodative.”


“The situation is simply so bad,” that “really the market is focused on the other negatives, like Portugal being downgraded,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “There is a negative spiral for Portugal and there are definite concerns about contagion to other bigger peripherals.”
The yield on two-year Portuguese notes was up 84 basis points at 17.59 percent as of 3:08 p.m. in London after reaching a record 18.28 percent. The 5.45 percent securities due in September 2013 fell 1.2, or 12 euros per 1,000-euro ($1,429) face amount, to 79.24.

Spanish two-year note yields rose four basis points to 3.66 percent, Italian yields on securities of similar maturity increased six basis points to 3.33 percent and Irish two-year yields jumped 67 basis points to 15.98 percent. Greek two-year notes fell, pushing the yield up 35 basis points to 28.79 percent.

ECB Collateral

The ECB extended its program of suspending collateral conditions for all securities guaranteed by the Greek and Irish governments to Portugal, after the nation was cut to below investment grade by Moody’s Investors Service two days ago. Trichet also maintained his view today that the central bank is unwilling to sanction a default by a euro-area nation.

German two-year yields were little changed at 1.58 percent and 10-year yields increased three basis points to 2.96 percent.

“On balance, Trichet was on the hawkish side, and he was a bit more hawkish than the market was expecting him to be, so we have seen a minor rise in bund yields,” Nordea Bank’s From said.(Bloomberg)