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UPDATE 2-Italian and Portuguese bond yields set for first yearly rise since 2011
December 30, 2016 / 12:33 PM / 7 months ago

UPDATE 2-Italian and Portuguese bond yields set for first yearly rise since 2011

4 Min Read

* Peripheral countries amongst losers in euro zone for 2016

* Weak banks, low growth, politics hit Italy, Portugal

* Investors offload long-dated bonds as QE changes loom (Updates price action, adds quote)

By Abhinav Ramnarayan and Dhara Ranasinghe

LONDON, Dec 30 (Reuters) - Italian and Portuguese government bond yields were on track on Friday to end 2016 with their first yearly rise since the 2011 euro zone debt crisis.

The rise in borrowing costs in the two peripheral countries, regarded as among the weakest links in the single currency bloc, comes against a backdrop of concern about weakness in their banking sector and economy as well as political instability.

"What we've seen is that most clients and investors have been worried about the banking situation. There were noises at the start of the year about the Italian NPLs (non-performing loans) situation, and it is still very much in the spotlight," said BBVA strategist Jaime Costero Denche.

He said the threat of ratings downgrades from DBRS for both countries adds to the concerns, as does the political situation in Italy in particular.

Matteo Renzi stepped down as prime minister this month after voters rejected constitutional changes in a referendum. The possible rise of anti-establishment party 5-Star Movement is also a concern for the future, Costero Denche said.

Italy's 10-year government bond yield has risen about 23 basis points this year to around 1.83 percent. Portuguese 10-year bond yields have soared about 127 bps this year to 3.80 percent. That marks the first annual rise in borrowing costs in both countries since 2011, according to Tradeweb data.

Portugal's bond market has been a consistent underpeformer this year with negative returns for investors.

In Italy, efforts to resolve the banking crisis and the swift formation of a new government after Renzi's resignation have helped Italian bonds recover some ground recently.

Ten-year Italian yields were set to end December with a fall of around 15 bps, the biggest monthly fall since March.

"The Italian banking crisis tells us that national governments are willing to fill all the holes which the system has at any cost," said Naeem Aslam, chief market analyst at Think Markets.

Ecb Qe Changes Loom

Long-dated euro zone government bonds sold off on Friday, the last day before changes to the European Central Bank's bond-buying scheme kick in and the final trading day of 2016.

The ECB announced changes earlier this month to the parameters of the quantitative easing programme, or PSPP, that suggested the focus of purchases would shift to the short end.

The changes include removing the deposit rate floor for purchases and making the minimum maturity for eligible bonds one year instead of two. Euro zone bond curves are expected to steepen as a result, and the market moved on those expectations on Friday.

"It will take a few weeks to see how the ECB and the national central banks adjust their purchases, but the way inflation prospects evolve as well as the PSPP will be a driver," said DZ Bank strategist Christian Lenk.

German 30-year bond yields rose 7 basis points to 0.94 percent. Benchmark 10-year Bund yields were 3 bps higher at 0.20 percent.

Most other euro zone bond yields were 3 to 8 bps higher on the day, facing upward pressure from looming supply.

France said on Friday it would sell 8.5 billion to 9.5 billion euros ($9 billion to $10 billion) of long-term government bonds next week. Spain said it would also sell bonds next week.

For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Editing by Larry King)

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