Watch These Bond Yields After Moody’s Cuts Portugal to Junk

After Moody’s (NYSE:MCO) downgrade of Portugal to junk yesterday and the continued squabbling over the role of investors in Greece’s new bailout package, bond yields in multiple European nations skyrocketed. Italy’s 10-year-bond reached its highest level in almost three years, Ireland’s 2-year bond yield jumped above 15% for the first time, and the extra yield investors demand in order to hold Portugal’s 10-year bonds over German 10-year bunds increased 148 basis points to a record 949, the highest yield since the euro has been in place.

Moody’s (NYSE:MCO) says that Portugal, like Greece, will likely need a second aid package that will probably require private sector investors to contribute, again like the newest Greek package, which would increase the risk of holding Portugal’s debt. The ratings company says that private sector investment will hurt Portugal’s ability to return to capital markets and risk aversion in the market.

Portugal’s financing costs rose after the sale of 848 million euros ($1.2 billion) worth of three-month bills Wednesday. The notes were priced to yield 4.926%, up from 4.863% from their last sale, and more than Germany pays for 30-year bonds.

And it looks like Greece could also be set for another downgrade from Standard & Poor’s (NYSE:MHP) and Fitch Ratings if the EU goes through with its plan to have creditors roll over expiring Greek bonds into new debt. The ratings services would constitute that action as the equivalent of going into default, though the European Central Bank chose the option in hopes of avoiding a default rating.

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With a possible default rating looming for both Greece and Portugal, Germany (NYSE:EWG) is going back to a plan earlier rejected by the ECB to ask investors to voluntarily swap out Greek debt into longer-maturity securities. The Institute for International Finance, which represents over 400 banks and insurers, is also asking investors to buy back Greek bonds on the secondary market to reduce its debt load, an idea the EU rejected back in March after setting up a system that only allowed investors to buy bonds at auction.

It seems every agency and government in Europe has an idea of how to deal with Greece’s bailout, which is why the nation’s second aid package, originally projected to be finalized in mid-July, has now been delayed until September.

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