Portugal’s Bonds Post Longest Run of Declines in Five Months

  • Securities face precarious ratings position, says Barclays
  • Nation is the periphery area’s ‘problem child’: SEB’s Daheim

Portugal’s government bonds fell for a fifth day, the longest run of declines since February, as the nation faced the prospect of a fine for breaching budget-deficit limits.

Yields on the nation’s 10-year securities have steadily climbed from the three-month low reached on July 1. Portugal was hit last week by an unprecedented European Union move to penalize it, along with Spain, for exceeding deficit limits designed to avert another debt crisis. That was just the latest challenge for a country that also suffers bad loans in its banks and whose government is reversing some of the reforms introduced under its bailout.

“Portugal has been a problem child in the periphery space,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. Its bonds have been hurt “since the new government canceled some of the previous reform and austerity measures. Portugal is now back in the spotlight.”

The 10-year bond yield rose four basis points, or 0.04 percentage point, to 3.12 percent as of 4:19 p.m. London time. That’s up from as low as 2.91 percent on July 1.The 2.875 percent security due July 2026 fell 0.355, or 3.55 euros per 1,000-euro ($1,105) face amount, to 97.91.

Yields on similar-maturity German bonds rose two basis points to minus 0.17 percent. The extra yield Portuguese bonds offer over these benchmark securities widened for a fifth day to 3.29 percentage points.

Yields on Spanish 10-year bonds climbed two basis points to 1.17 percent, while those on Italian securities due 2026 advanced two basis points to 1.21 percent.

Ratings Risk

Portugal’s bonds have been the worst performers in the euro area this year, with a loss of 1.4 percent, compared with a 3.9 percent gain in Italy’s securities and a 7.1 percent return on German bunds, according to Bloomberg World Bond Indexes.

Sovereign bonds from Portugal are still considered investment grade by ratings agency DBRS Ltd., making them eligible for purchase under the European Central Bank’s quantitative-easing program.

With the nation’s debt rated junk by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, a downgrade by DBRS would hit the country’s banks and raise the prospects of Portugal requiring more debt relief, Barclays Plc analysts including London-based Antonio Garcia Pascual wrote in a note.

“Should DBRS decide to downgrade Portugal” below investment grade, “the loss of ECB-eligibility would create significant funding problems for Portuguese banks along with the cessation of QE purchases,” the analysts wrote, adding that this was not what they expected to happen.

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