EURO GOVT-Portugal yields hit record high, seen rising

* Portuguese yields hit record highs after Moody’s cut

* Portugal yields converging with Ireland, seen above 10 pct

* Greece seen good guide to where Portugal yields can go

(Adds detail, fresh quotes, background)

By Emelia Sithole-Matarise

LONDON, April 5 (Reuters) – Portuguese bond yields rose to
their highest since the euro’s launch, and were expected to top
10 percent in the coming days, after a new credit rating cut
piled pressure on Lisbon to seek a bailout.

Portugal’s 10-year yields rose as high as 9.033 percent
(PT10YT=TWEB: Quote, Profile, Research) on Tuesday and credit default swaps implied a 41
percent probability of a default within five years, compared
with 33 percent at the end of February, provider CMA said.

The relentless rise in yields, which was compounded after
Moody’s downgraded Portugal’s ratings by one notch to Baa1, is
raising further the costs of refinancing debt — as a treasury
bill auction on Wednesday is expected to underscore.

Traders and investors have kept pushing yields higher and
each credit rating downgrade by the three major ratings firms
has accelerated this trend. Portugal has been downgraded three
times in the past week alone and is one notch away from losing
its investment grade rating from two firms.

Michael Leister, a strategist with WestLB, said the best
guide to how high Portuguese yields could go was what had
happened to Greece.

“Given where five-year and 10-year Greek yield levels are
there’s substantial room for Portugal to go higher,” he said.

Greek two-year bonds yield 700 basis points above equivalent
Portuguese debt.

The yield on 10-year Greek bonds hit euro-era peaks above 13
percent at the height of the sell-off in that country’s debt
before it was forced to seek an international bailout last May.

The Portuguese yield curve peaks above 10 percent in the
five-year sector, signalling markets see an increasing risk that
Portgal’s debt could be restructured within that time horizon.

Greek and Irish curves flattened in a similar manner prior
to both entering a bailout programme.

Portuguese 10-year bond yields are also close to converging
with those of Ireland near 10 percent, though Irish bonds have
trimmed some losses since last week when stress tests helped
ease investor concern about its shaky banking sector.

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Portuguese and Irish yields http://link.reuters.com/xyg88r

Euro zone debt struggle graphics http://r.reuters.com/hyb65p

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Portuguese five-year credit default swaps rose as much as 18
bps on the day to 598 bps, according to provider Markit, meaning
it costs 598,000 euros to protect an exposure of 10 million
euros of debt.

Markit said the cost of protecting the bonds against a
default had surpassed that of Ireland, which has already sought
a bailout, for the first time since August.

“Even though Moody’s still rates the sovereign two notches
higher than Standard & Poor’s, the downgrade is another blow to
sentiment,” said Gavan Nolan, an analyst at Markit.

Portugal’s political limbo before a snap election on June 5
is seen complicating its efforts to fund itself ahead of bond
redemptions in April and June.

The country must pay 4.8 billion euros in redemptions and
coupons in mid-April and 6.95 billion euros in June. Although
analysts think it can probably make the first payment, many see
an eventual bailout as inevitable.

Portugal’s neighbour Spain has escaped the surge in
borrowing costs of the more indebted euro zone issuers, with its
bond yield premium over German benchmarks narrowing. However
investors are on alert for any fiscal slippage, with the
European Central Bank expected to raise interest rates this
week.

Lombard Odier Investment Managers, with assets under
management worth 33 billion Swiss francs ($35.80 billion) said
it was underweight peripheral euro zone sovereign debt, citing
concern about the impact of higher official borrowing costs on
some of these countries’ economic recovery.

“We are concerned that spreads may move wider to reflect the
underlying debt sustainability issues that peripheral economies
face, particularly in the wake of ECB policy tightening,” said
Gregor MacIntosh, head of rates at the firm.

German bonds, the euro zone benchmarks, were largely steady,
underpinned by the problems plaguing Portugal, but the trend for
higher yields there remained intact ahead of Thursday’s ECB
policy meeting.

(Graphic by Kirsten Donovan)

EURO GOVT-Portugal yields hit record high, seen rising