Bond Traders Confident Portugal Will Retain All-Important Rating

  • DBRS rating is the only thing keeping nation eligible for QE
  • Yield spread over German debt is the lowest in a month

The closer Portugal gets to its crucial rating review, the more relaxed investors appear.

Portugal’s 10-year bonds rose for a fifth day, pushing the extra yield they offer over German securities to the lowest in a month, as traders awaited DBRS Ltd.’s rating decision on Friday. The Canadian company is the only major agency to grant the nation an investment grade, without which its debt would be ineligible for purchase by the European Central Bank.

“There’s been a little bit of pricing out” of a Portugal downgrade in the bond market, said Lyn Graham-Taylor, a rates strategist at Rabobank International in London. “It’s unlikely they’ll downgrade Portugal when we analyze what the sovereign analysts were saying publicly, and also because DBRS tend to be much more long-term looking. There have also been some positive noises about the 2017 budget.”

Portugal’s 10-year bond yield fell five basis points, or 0.05 percentage point, to 3.19 percent as of 3:25 p.m. in London. The 2.875 percent security due in July 2026 rose 0.425, or 4.25 euros per 1,000-euro ($1,097) face amount, to 97.365.

The spread over similar-maturity German debt was at 316 basis points, the lowest since Sept. 13.

DBRS kept Portugal’s status at BBB (low) -- its lowest investment grade -- at its last review in April. For its bonds to qualify for purchase under the ECB’s quantitative-easing plan, the nation must be rated investment grade by at least one major ratings company.

QE Lifeline

Concern Portugal would lose this lifeline weighed on its securities for much of this year, making them the developed world’s worst performers of 2016 with a 1.2 percent loss, versus a gain of 5.1 percent across the euro zone, Bloomberg bond indexes show.

Yet the bonds have risen since Portugal’s finance chief said Oct. 10 that DBRS took a positive view on the nation’s fiscal efforts. The gains accelerated after the government said last week that the budget deficit would narrow next year.

Before the DBRS review, the ECB will tomorrow announce its latest policy decision, with analysts surveyed by Bloomberg predicting the Frankfurt-based institution will keep its bond-purchase program going and leave interest rates on hold at record lows.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE