• DBRS is scheduled to review nation's rating on Friday
  • A downgrade to junk may jeopardize nation's QE eligibility

Portuguese bonds underperformed their euro-area peers, sending the yield premium over German bunds to the most since July, as investors awaited a credit rating review that could see the securities excluded from the European Central Bank’s asset-buying program.

The securities were little changed on Friday as Portugal’s caretaker Prime Minister Pedro Passos Coelho called for early elections. Portuguese bonds were Europe’s worst-performing sovereign debt market in the past week after Socialist opposition lawmakers formed a majority to block the government’s program of reform and budget constraint and oust Coelho.

For Portugal’s bonds to be eligible for purchase by the ECB, the nation must be rated investment grade by at least one major ratings company. While it has already been junked by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, the country still holds investment-grade status at DBRS Ltd., which is scheduled to review its position on Friday.

https://twitter.com/DBRSRatings/status/664171840093425665

“Uncertainty remains very high about what is actually going to happen with this left bloc,” said Lyn Graham-Taylor, a London-based rates strategist at Rabobank International. “For a while we’ve been not advocating the purchase of Portuguese bonds.”

Portugal’s 10-year yield was at 2.77 percent as of 12:47 p.m. London time. The price of the 2.875 percent security due October 2025 was 100.9 percent of face value.

The additional yield investors demand to hold the Portuguese bonds over equivalent-maturity German bunds rose two basis points to 219 basis points. It earlier touched 223 basis points, the widest spread since July 9. The nation’s bonds lost 1 percent in the week through Nov. 12, according to Bloomberg World Bond Indexes.

Even if the nation is downgraded, a waiver allowing the ECB to keep buying their bonds may be possible, Commerzbank AG analysts wrote in a research note published Nov. 9. An ECB spokesman declined to comment on the policy when contacted by Bloomberg on Nov. 11. The central bank had purchased 9 billion euros of Portuguese debt under the program through the end of October.

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