As Portuguese government bond yields blew out by nearly 150bp on Wednesday morning following a second resignation from the coalition cabinet, Portugal Telecom’s and EDP’s euro cash curves were around 50-65bp wider for choice, while the cost of protection on PT was 50bp wider at 530bp and 58bp wider in the cause of EDP at 382bp.
Needless to say the heat was on Portugal to diffuse the situation overnight, and to a certain extent they managed to do exactly that, with PM Coelho and the CDS party having a constructive meeting in Lisbon. Foreign Minister Portas, whose resignation sparked the chaos in financial markets yesterday, said that he wants a viable solution for the coalition with guarantees CDS will have policy influence.
Cue an initial contraction in Portuguese 10yr yields back down to 7%, before drifting higher again close to last night’s close of 7.35%. This was fuelled by a couple of small retail sell orders, which, given the ongoing lack of liquidity in the market, is more than enough to spark a 30bp move at the moment.
Meanwhile, Portugal Telecom’s cash curve is 20-30bp tighter versus swaps for choice this morning, with its cost of protection 17bp tighter at 500bp. EDP’s euro curve is bid around 15-20bp tighter in cash while its 5yr CDS has contracted by some 10bp to 372bp.
Should that sovereign widening morph into something more unsettling as the day progresses, we can expect the renaissance of the country’s two most liquid corporates to be short lived.
