EURO GOVT-Portuguese bonds calm after aid request; ECB hikes

* Portuguese yields steady after bailout request

* Wednesday’s fall seen as only temporary relief

* Shorter-dated yields converge with Irish curve

* Spanish bond sale sees good demand; no signs of contagion

* ECB raises rates to 1.25 percent

By Kirsten Donovan

LONDON, April 7 (Reuters) – Portugal’s bonds were steady on
Thursday after it became the third euro zone country to seek
financial aid but yields may well push higher again as the
country grapples with a new phase of its debt crisis.
Meanwhile, the European Central Bank raised its main
refinancing rate to 1.25 percent, the first hike since mid-2008
in an attempt to contain inflationary pressures.

With a further two rate hikes priced in by year-end, markets
will be scrutinising comments from ECB President Jean-Claude
Trichet at 1230 GMT for clues on any further tightening.

Widely expected negotiations with Lisbon for financial
assistance will take place as a campaign kicks off for a June 5
general election [ID:nLDE7360LT], leaving investors watching to
see if a line will finally be drawn under the euro zone’s debt
woes or if speculators will turn on Spain.

“The absolute key for Portugal, Ireland and Greece is
whether the continuation of liquidity provision can allow them
to get the fiscal situation on a better footing, and if not
they’ll have to restructure (their debt),” said Gary Jenkins,
head of fixed income at Evolution Securities.

“Bondholders need to look where Portugal is priced versus
Ireland and Greece, look at what potential haircut they would be
in for if such an event occurs and monitor the situation on an
ongoing basis, looking at the economic data.”

Yields on Portuguese government bonds fell by up to 35 bps
on Wednesday, which traders said suggested there may have been
some anticipation of the aid request ahead of an official
statement late in the day.

But the relief may be short-lived if past events are an
indicator — Greek and Irish yields resumed their rise shortly
after bailouts were agreed.

“Maybe it takes away a bit of uncertainty but generally we
see these knee-jerk positive reactions which then fade,” said a
trader.

Commerzbank strategists said Portugal could face further
credit rating cuts, which would push the country to “junk”
status and trigger more forced selling from accounts unable to
hold lower-rated paper.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Graphic on Greek and Irish bond yields post-bailouts
http://link.reuters.com/fuq88r

Graphic of Irish and Portuguese yield curves converging
http://link.reuters.com/mar88r

Timeline on Euro zone debt crisis in the last year
http://link.reuters.com/xur78r

Reuters Insider: Will Aid for Lisbon Save Spain and Italy?
http://link.reuters.com/cyq88r

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Irish bonds outperformed, continuing this week’s trend after
after concerns about Ireland’s ailing banks abated following
stress test results last week.

The fall in Irish bond yields, coupled with the rise in
Portuguese yields over the last week or so has seen the two
yield curves converge.

“When you look at the underlying metrics on Portugal, the
banking sector isn’t as bad as Ireland and the public sector is
nowhere near as bad as Greece so if the right consensus is
reached about austerity and a financing package is forthcoming,
it could be more beneficial for Portugal than the other two,”
said Nomura rate strategist Sean Maloney.

Maloney suggested trading the ranges already seen for
Portuguese bond yields with Wednesday’s euro lifetime highs —
9.10 percent for ten-year bonds and 10.26 percent for five-years
— as a limit for now, with potential for moves to around 100
basis points lower.

Any fears of contagion were seen off for the time being as
Spain comfortably sold just over 4 billion euros of new
three-year bonds [ID:nLDE7360V6], completing around 35 percent
of its funding target for this year, according to Reuters data.

“That should allay any contagion fears — they have sold a
good amount at 4.1 billion and it’s come through secondary
market levels with decent coverage,” said Peter Chatwell, rate
strategist at Credit Agricole.

June Bund futures (FGBLc1: Quote, Profile, Research) were 22 ticks lower at 120.40

A sustained break below Wednesday’s low of 120.51 would open
the way to 120.00, analysts said, which corresponds to around
3.59 percent in 10-year yields.

Two-year bond yields (DE2YT=TWEB: Quote, Profile, Research) were little changed at
1.849 percent, with 10-year yields (DE10YT=TWEB: Quote, Profile, Research) up 2.5 bps at
3.45 percent.

France also sold 9.5 billion euros of bonds into solid
demand [ID:nLDE68C0H1].

EURO GOVT-Portuguese bonds calm after aid request; ECB hikes