Rescuing Europe's Worst Government Bonds May Take More Than ECB

  • Portugal is only sovereign debt market to post quarterly loss
  • ECB expanded its bond-buying program at start of April

It’s gone from bad to the worst for investors in Portuguese bonds.

While government debt in the euro region posted the biggest quarterly returns since the European Central Bank started its quantitative easing program a year ago, holders of Portuguese securities were left nursing a loss. Political wrangling to form a government and then a shift in budget policy have been dragging down the market more than in Spain, which is still without an elected government, or even Greece, a byword for crisis.

Portuguese bonds lost 1.3 percent in the three months through March 31, compared with an average gain of 3.3 percent in the euro area, according to Bloomberg World Bond Indexes. Greece managed to eek out a 0.4 percent return.

“The situation in Portuguese bonds has been compromised by the election result and the instability that came after,” said Gianluca Ziglio, a strategist at Sunrise Brokers LLP in London. “That creates uncertainty with potential impact on the rating.”

While Portugal’s bonds have also benefited from the ECB’s expansion of its asset-purchase program by 20 billion euros ($23 billion) a month starting April, they have had a torrid year as investors avoided what they consider the riskiest assets.

Junk Rating

The issue is that Portugal’s prospects just look gloomier compared with neighboring Spain, even without their respective political battles. Portugal’s economy is forecast to grow 1.5 percent this year compared with 2.7 percent in Spain and 4.7 percent in Ireland.

Another country that had to resort to a bailout at the height of the sovereign debt crisis, Ireland last week sold a bond that matures in a century at 2.35 percent. Portugal has to pay about 3 percent just to borrow for a decade. The nation’s 10-year bond yield increased two basis points to 2.94 percent on Monday.

Portugal is rated below investment grade, or junk, by Fitch Ratings, Moody’s Investors Service and Standard & Poor’s. It’s only the grading by DBRS Ltd., which is scheduled to next review its position on April 29, that gives the country enough creditworthiness to qualify for purchases under the ECB’s QE program.

“We are still more cautious when it comes to Spain or Portugal,” said Daniel Lenz, lead market strategist at DZ Bank AG in Frankfurt, who favors bonds from Italy because of the country’s relative political stability. “The whole rally in the periphery is being missed by Portugal, especially in the last few days.”

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