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CDS Worries in Portugal Send Yields Higher and European Markets Lower

“Contracts protecting against losses on Portuguese sovereign and corporate bonds led increases in Europe’s credit-default swap markets as the nation’s borrowing costs jumped.

Swaps insuring Portugal’s sovereign debt surged as much as 105 basis points to 507, the biggest advance since May 2010 and the highest level in eight months, according to data compiled by Bloomberg. Contracts on EDP-Energias de Portugal SA, the country’s biggest utility, climbed 60 basis points to 392.5 basis points at 11:40 a.m. in London, while Banco Comercial Portugues SA increased 47 basis points to 593 and Banco Espirito Santo SA rose 44 basis points to 560.

Portugal’s 10-year bond yield topped 8 percent for the first time this year after two ministers quit the coalition government, putting budget cuts at risk as the country works to meet the terms of its bailout program. Rating downgrades of European banks and unrest in Egypt also drove up credit risk.

“Portugal is almost certainly going to become a crisis,” Bill Blain, a strategist at Mint Partners Ltd in London, wrote in a note to clients today. “When politicians walk away from government, you know a new election is coming. That’s the point economic reform dies.”

The cost of insuring European corporate debt against default rose to the highest in a week, signaling deterioration in perceptions of credit quality.

Credit Risk

The Markit iTraxx Crossover Index of default swaps on 50 companies with mostly high-yield credit ratings climbed 22 basis points to 478. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings added 5.5 basis points to reach 120.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased 13 basis points to 176 and the subordinated index rose 20 to 262….”

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