Portuguese 10-year bond yields hit 9-month high

Posted on November 17, 2016

Vulnerable.

Portugal is leading the fresh sell-off in government bonds today, with the country’s benchmark 10-year yield hitting its highest level since market jitters struck in February (the yield falls when a bond’s price rises).

Investors are dumping bonds from the eurozone’s fifth-largest economy and former bailout recipient amid renewed fears about emerging political fragility in the single currency area.

Portugal managed to catch a break last month after it avoided a ratings junking that would have kicked it out of the European Central Bank’s bond-buying programme.

But the country is firmly back in the eye of a market storm, as its high debt levels (130 per cent of GDP) and sluggish growth leave it vulnerable to bond market pressures. The 10-year yield is up 4 basis points today to 3.71 per cent, climbing from the 2.68 per cent low hit in mid-August.

On Wednesday, the European Commission warned Portugal’s 2017 draft budget was at risk of “non-compliance” with its deficit limits, but avoided hitting the government with sanctions that would freeze regional aid to the country.

After a brief morning rally, most European government bonds are falling back today, dragged lower by US treasuries where yields are up 2 basis points to 2.24 per cent. UK 10-year gilts have leapt 3.5 basis points, and Italy’s equivalent maturity bond yield have gained 5 basis points.

Bond markets have been electrified in the wake of Donald Trump’s election as US president, as investors dramatically shift their outlook for higher US inflation on the back of a bumper fiscal injection in the form of expected tax cuts and higher government spending.

Mr Trump’s success has raised concerns about Europe’s insurgent populist movements, with a looming referendum in Italy next month and elections in three of the eurozone’s four biggest economies next year.

Inflation in the eurozone is expected to remain sluggish at below 2 per cent for the next two years, according the European Central Bank. Despite the European Commission recommending a 0.5 per cent fiscal boost to help the eurozone escape a low growth trap next year, a Trumpian fiscal injection is unlikely to be forthcoming in the eurozone.

Germany, the continent’s largest economy has already pushed back against any notion it should carry out higher spending.

“It does not look likely that the eurozone will be fully Trumped any time soon”, said Carsten Brzeski at ING.

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