EURO GOVT-Bund yields edge up; Portuguese debt on the ropes

* Bund yields edge up on strengthening ECB rate hike view

* Portuguese yields hover near euro-era record highs

* Portuguese, Irish 10-year yields seen converging near-term

By Emelia Sithole-Matarise

LONDON, March 29 (Reuters) – German government bond yields
edged up on Tuesday and the trend higher is set to continue on
firm expectations the European Central Bank will raise interest
rates at its policy meeting next week.

The sell-off in Portuguese debt eased slightly but yields
were around euro-era record highs as investors fretted that the
country’s political limbo before snap elections could complicate
efforts to meet debt redemptions in coming months.

German Bunds failed to gain much momentum from strain in
euro zone peripheral bonds, with German data suggesting
inflation eased in March doing little to scale back market bets
for tighter monetary policy.

President Jean-Claude Trichet on Monday said inflation in
the euro zone was “durably” above the bank’s target of close to,
but below 2 percent, cementing predictions of a hike next week.

“Although some of the German inflation numbers were less
than forecast it still points to inflation pressures,” a trader
said.

“It does look as though the ECB are going to hike
regardless. It’s very difficult for people to go and start
buying bonds when they know the ECB is probably going to hike.”

Two-year Schatz yields were last 1.6 basis points higher on
the day at 1.753 percent (DE2YT=TWEB: Quote, Profile, Research) while 10-year Bund yields
(DE10YT=TWEB: Quote, Profile, Research) were up about one basis point at 3.305 percent.

These moves flattened the yield curve by a basis point to
155 bps and could match last week’s lows of 150 bps before the
ECB’s rate-setting meeting next week.

PORTUGUESE/IRISH CONVERGENCE

Among peripherals, Portuguese yields stayed around euro
lifetime peaks, with the 10-year at about 8.14 percent, but are
seen resuming their upward trend on growing market conviction
the country will follow Ireland and Greece in seeking a bailout.

“If they are going to be bailed out then there’s no reason
why Portuguese yields shouldn’t trade in line with Irish yields.
In theory they have a fair bit further to go. It’s a natural
target for them,” a trader said.

Irish 10-year yields were up about three bps on the day at
10.177 percent. Some traders said they saw little respite for
the more indebted euro zone issuers given the ECB’s absence so
far this week from the secondary market after it bought 432
million euros worth of bonds last week.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Portuguese, Irish yield curves http://link.reuters.com/mam78r Euro zone debt struggle http://r.reuters.com/hyb65p ECB bond buying and spreads http://r.reuters.com/wum27q Portuguese yield curve graphic http://link.reuters.com/wem78r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

“A 30 basis point inversion between the 2014 and the 2021
strikes us as too little,” Societe Generale strategists said in
a note.

“If Portugal enters the (EU rescue funds) EFSF/ESM and
Portuguese bonds are restructured, we expect the 2014s to be hit
hardest in price terms, at first — with each bond in the
restructuring to be exchanged for a new security some three
years later.”

Portugal’s political limbo before the snap election is seen
clouding its efforts to fund itself ahead of bond redemptions in
April and June.

The country must pay out 4.8 billion euros in redemptions
and coupons in April and another 6.95 billion euros in June, and
although analysts think it can probably make the first payment,
an eventual bailout is seen as inevitable.

“The real concern comes more towards the June expiries. They
still have time and I think they’ve got enough to fund April.
It would be very unusual for a sovereign to run its financing so
close to expiries,” a trader said.

“The market pressures are more along the lines of creating a
self-fulfilling prophecy (towards a bailout). Not passing the
budget and having have to form a new government is something
that’s calming the market down.”
(Graphics by Scott Barber and Kirsten Donovan; Editing by
Catherine Evans/Ruth Pitchford)

EURO GOVT-Bund yields edge up; Portuguese debt on the ropes