EURO GOVT-Portuguese bonds stable before T-bills sale

* Portugal T-bill sale closely watched after banks ultimatum

* Bunds weak before Thursday’s ECB meeting

* German paper may outperform triple-A rated peers -Investec

By Marius Zaharia

LONDON, April 6 (Reuters) – Portuguese yields were steady
on Wednesday as uncertainty surrounded a treasury bill sale
later in the day after local banks threatened to stop buying the
government’s debt unless it immediately seeks a bailout.

Portuguese bond yields have reached new euro lifetime highs
on a daily basis over the past few sessions after the country’s
ratings were downgraded following a government collapse that has
left the country in political limbo.

The tender will test investors’ appetite for supporting
Portugal in its attempt to remain liquid until after the June 5
election. Most economists saw Portgual as more likely than not
to be able to sell the debt, albeit at a higher cost of funds.

“I am flying blind on this and I think much of the market
is,” said Peter Chatwell, European fixed income strategist at
Credit Agricole. “(A failed tender) would have an immediate
impact on sentiment.”

“It is going to be a real test. You can see there has been
some really strong selling of the longer part of the curve.
Perhaps that may be an attempt to reduce (long-term) exposure on
Portugal to buy some bills.”

Portugal’s benchmark 10-year bond yield (PT10YT=TWEB: Quote, Profile, Research) was
last up 1.1 basis points at 9.011 percent, having hit a euro
lifetime high of 9.03 percent the previous day.

Two daily newspapers reported on Wednesday that Portugal’s
social security fund has been selling overseas assets in the
last few days to help finance the country by buying its debt at
auction. [ID:nLDE7350C0] [ID:nLDE73429R]

“The rationale for buying this paper is it matures well
before 2013, when restructuring risk for all stressed peripheral
issuers is heightened,” ING strategists said in a note. “Hence
we expect the bills auction to go fine. The real barometer of
sentiment is what level the bills get taken down at.”

PLAYING ECB’S LIKELY RATE HIKE

Bunds were likely to remain rangebound before Thursday’s
meeting of the European Central Bank, which is expected to
increase interest rates by 25 basis points from the current
record low of 1.0 percent, its first rise since July 2008.

The benchmark 10-year Bund yield (DE10YT=TWEB: Quote, Profile, Research) was up 1.1
basis point at 3.403 percent, while the two-year Schatz yield
(DE2YT=TWEB: Quote, Profile, Research) was up 0.6 bps at 1.848 percent. June Futures
(FGBLc1: Quote, Profile, Research) were last 4 ticks lower at 120.89.

The ECB meeting may cause some volatility in the short-term,
but Bund yields are expected to continue their longer-term
rising trend. Investors are looking for relative value plays
between triple-A rated paper.

Russell Silberston, head of global interest rates at
Investec Asset Management, which manages fixed income assets
worth $29 billion, said he was waiting for the ECB meeting
before betting on Bunds against UK Gilts and U.S. Treasuries.

“By tightening early, we believe the peak in interest rates
would be lower than it would have been otherwise,” Silberston
said. “If … policy is normalising, the view that we really
want to take is that Bunds are going to outperform Treasuries
and the UK (gilts) because the ECB have been pre-emptive, and by
doing that there’s less problems going further.”

He said this would be a medium-term view, typically for a
year ahead, and it would be confirmed if the ECB presented its
likely hike as a “part of a steady, slow normalisation process”.

“If it is presented as a one-off we will be more cautious,”
Silberston said, adding that he now expected euro zone interest
rates to peak at 3.5 percent by the end of 2013, compared to
January, when he expected rates to peak at 4 percent.

Germany auctions around 5.0 billion euros of Schatz notes
later in the day, while Finland plans to sell up to 1.5 billion
euros of 2016 and 2025 bonds.
(Editing by Catherine Evans)

EURO GOVT-Portuguese bonds stable before T-bills sale