EURO GOVT-Portuguese yields rise, ignore successful auction

* Snap auction results good, but issuance not easy in Q2

* Irish debt outpaces Portugal, downgrades largely expected

* German Bunds lower as ECB seen hiking rates next week

By Emelia Sithole-Matarise and Marius Zaharia

LONDON, April 1 (Reuters) – Portugal’s bond yields hit fresh
euro lifetime highs on Friday with no respite seen after a well
bid extraordinary debt auction failed to improve the outlook for
the caretaker government’s second quarter quest for funds.

The country’s bond yields have surged by more than 200 basis
points above 9 percent at the short end with the 10-year sector
rising by almost 100 bps to 8.78 percent (PT10YT=TWEB: Quote, Profile, Research),
inverting the curve, after the government collapsed last month.

The yields are seen rapidly converging with those in
Ireland, which had to ask for an international bailout, and
whose 10-year bonds yield more than 10 percent.

Portugal’s president has called snap elections for
early-June and most market participants expect the new
government to have little choice but to ask for aid immediately
afterwards.

Meanwhile, the debt agency needs to find ways to pay back
4.77 billion euros of redemption and coupon payments in April
and 6.95 billion euros in June, according to Reuters
calculations.

“The dilemma is that the situation looks no better if
Portugal tries to cope on its own,” said Christoph Rieger, a
strategist at Commerzbank.

“Investor confidence has deteriorated to a degree where it
won’t be able to escape the adverse feedback loop of higher
yields and fiscal headwinds leading to a further erosion of
confidence and downgrades and thus again higher yields.”

Portugal’s 7 billion euros second-quarter debt issuance plan
started with a successful snap auction of one-year paper on
Friday, for which it found “specific demand”, meaning the result
was not indicative of investors’ willingness to lend Lisbon the
money. [ID:nLDE7300QU]

Traders said domestic investors may have been lined up and
there was market talk of Brazil or China giving a hand. Analysts
expect Portugal to chase opportunities for private placements,
but say its plan would not work for very long.

“It will remain a very difficult task for them to get money
in the market … it’s bizarre, but the more you have to pay the
less demand (there) is,” said Piet Lammens, strategist at KBC,
adding that “specific” demand will not be there for too long.

“You can do it out of generosity … but putting billions on
the table most of the time goes too far for generosity.”

The Portuguese/German 10-year government bond yield spread
(PT10YT=TWEB: Quote, Profile, Research) (DE10YT=TWEB: Quote, Profile, Research) expanded by five basis points to 541
bps, a new euro lifetime high. Five-year yields (PT5YT=TWEB: Quote, Profile, Research)
rose 21 bps to 9.85 percent.

Rabobank strategist Richard McGuire said he saw room for
Portuguese yields to rise by 100 basis points at the short-end
and by about 170 bps in the 10-year sector “fairly rapidly”.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic of Portuguese and Irish yields: http://link.reuters.com/cuz78r Graphic of Irish economy and banks: http://r.reuters.com/nyt78r Euro zone debt struggle (package of graphics)

http://r.reuters.com/hyb65p
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IRELAND DOWNGRADED

Irish bonds outperformed both Portuguese debt and German
benchmarks, with traders saying a ratings downgrade by Standard
& Poor’s and the threat of a cut by Fitch were already priced in
after bank stress results the previous day. [ID:nLDE72T20R]

However, market participants said Ireland was not out of the
woods yet as investors waited to see if it could get more
lenient terms for its bailout and progress on resolving its
banking crisis.

“Ireland is firmly in the category of Greece and Portugal,
that is totally high risk,” said David Schnautz, a strategist at
Commerzbank. “We still don’t recommend investors getting into
the paper until we get a firmer view of what’s going on with the
Irish economy and banking sector and the concessions regarding
the rates of the bailout.”

German Bunds continued their downward trend, with the June
future (FGBLc1: Quote, Profile, Research) settling 28 ticks lower at 121.00 on the firm
view the European Central Bank will hike interest rates next
week. Two-year cash yields were up about four bps at 1.832
percent (DE2YT=TWEB: Quote, Profile, Research) and the 10-year Bund yielded about two bps
less on the day at 3.383 percent (DE2YT=TWEB: Quote, Profile, Research).
(Graphics by Kirsten Donovan and Scott Barber; editing by
Stephen Nisbet)

EURO GOVT-Portuguese yields rise, ignore successful auction