Portugal’s Rising Sovereign-Bond Yields Catch the Eye of DBRS

  • Nation’s ‘cost of financing has increased’: DBRS’s McCormick
  • Portugal’s debt is 2016’s worst performer in developed markets

The rating company whose verdict currently matters most for Portugal is paying attention to the surge in the nation’s bond yields.

DBRS Ltd., whose rating is crucial for Portugal’s eligibility for the European Central Bank’s bond-purchase program, said that while the growing popularity of the nation’s minority Socialist government means the country’s political landscape has seen some stabilization, its rising yields and fragile economic recovery are still a concern. The Toronto-based credit company is alone among the four biggest in assigning the nation investment-grade status.

“Overall it’s looking fairly good politically” but “unfortunately, yields on bonds have increased, so their cost of financing has increased” and growth in the first half of this year was only “half of what was expected,” Fergus McCormick, chief economist and co-head of sovereign ratings at DBRS, said in an interview in London. “So you have two negatives and one positive.”

Questions over the sustainability of its debt, sluggish growth and unresolved problems at banks have driven Portugal’s bonds to be the worst performers among developed economies this year, according to Bloomberg World Bond Indexes.

Yields on the nation’s 10-year bonds have climbed 32 basis points, or 0.32 percentage point, to 3.36 percent in September, set for the biggest monthly increase since January, while the yield premium investors demand to hold the securities over similar-maturity German bunds reached 3.55 percentage points this week, the highest close since February.

Concern over Portugal’s credit rating have also played a part. With the ECB purchases helping insulate the securities from a more aggressive selloff, analysts say maintaining access is crucial to keeping the nation’s borrowing costs in a manageable range. DBRS will review Portugal’s BBB (low) grade status on Oct. 21, after keeping its stable trend intact in the last credit review in April.

“The Portuguese government is fully committed to economic policies that are compatible with DBRS’s current rating and that will pave the way to grant an upgrade in the near future,” Portugal’s Finance Ministry said by e-mail.

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“If the ECB stops buying, then investors stop buying,” said David Schnautz, a director of fixed-income strategy at Commerzbank AG in London. “That could easily lead to a loss of market access at affordable yields for Portugal.” Schnautz says DBRS may lower the trend to negative in the next review, while maintaining its current status as investment-grade.

While Portugal’s growth is running below that implied in 2016’s budget, Prime Minister Antonio Costa has pledged to meet the country’s deficit-reduction goals this year, saying the budget deficit will be “comfortably” below a 2.5 percent target set by the European Commission. The government is counting on a planned 2.7 billion-euro ($3 billion) capital injection into Caixa Geral de Depositos SA to help shore up that state-owned bank’s finances.

CGD’s recapitalization is a “one-off” event that is unlikely to trigger a “rating action” by the company, DBRS’s McCormick said. “It’s a good intention to try to resolve banking-sector issues, but the truth is they have a very high debt burden, they are very exposed to shocks. That’s a cause for concern.”

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