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Portugal shows QE limits as euro bond rebound leaves it behind

Portugal shows QE limits as euro bond rebound leaves it behind

LISBON: Portugal just can’t shake off its bears. The nation’s bonds are underperforming their counterparts across the euro area even as a recovery in stocks and oil prices boosted demand for higher-yielding assets.

The extra yield, or spread, that investors get for holding Portuguese 10-year bonds instead of the benchmark German bund climbed for the first time in four days. The country’s two-year note yields are more than 1 percentage point higher than those in neighboring Spain, whose leaders have been unable to form a government after inconclusive elections in December.

Portuguese bonds are weighed down by political challenges to austerity policies that were set with the approval of its creditors. That’s diluting the impact of European Central Bank asset purchases that otherwise support bond prices and have pushed down shorter-dated yields across the region, except for Greece’s, to less than or near zero.

Germany sold 10-year bonds to yield 0.26 percent on Wednesday, while market prices signal Portugal would be charged about 1.30 percent to borrow for just two years. ECB President Mario Draghi earlier in the week said the institution will take measures if financial turmoil threatens its policy goals, without being more specific about the options for quantitative easing.

“Despite the recovery we’ve seen, the selloff trend is not over yet,” said Daniel Lenz, lead market strategist at DZ Bank AG in Frankfurt. “Portugal definitely stands out. Yields point to this highly extended risk that investors have started pricing in. ”

Portugal’s 10-year bond yield increased two basis points, or 0.02 percentage point, to 3.56 percent as of 12:36 p.m. London time. The 2.875 percent security due July 2026 fell 0.19, or 1.90 euros per 1,000-euro face amount, to 94.1. That left the yield premium over benchmark bunds at 329 basis points, from less than 200 basis points at the start of 2016. Portugal’s 10-year yield reached 4.53 percent on Feb. 11, the highest since March 2014.

The nation’s two-year note yield was at 1.31 percent, compared with 0.035 percent in Spain and minus 0.51 percent in Germany. Germany’s 10-year bund yield was little changed at 0.28 percent, having been as low as 0.13 percent on Feb. 11, the least since April.