Portugal Bonds Lead Peripheral Rally on Debt Rating Upgrade

Updated on
  • Ireland bid too as Moody’s lifts country’s rating to A2
  • Portuguese 10-year yield falls to the lowest in 20 months

Portuguese debt led a rally in euro-area peripheral bonds after S&P Global Ratings raised the nation’s credit rating to investment grade.

The yield on benchmark 10-year notes slid to a 20-month low after S&P revised the sovereign rating to BBB- from BB+ with a stable outlook. Bonds in Ireland were bid after Moody’s lifted the sovereign rating to A2 from A3, citing a faster-than-expected pace of economic growth in the nation.

The risk premium on Portuguese debt declined on Monday as Finance Minister Mario Centeno said he expects greater demand for his nation’s debt from a broader array of investors to spur lower borrowing costs both for the government and corporations. The Bank of Portugal forecasts economic growth in the nation, which exited a three-year international aid program in 2014, will accelerate to 2.5 percent this year from 1.4 percent last year. DBRS already has an investment-grade rating on Portugal.

“The big implication is that we now have two ratings in the investment grade territory and one from the big one, S&P, so everybody is looking for others to follow which means your investment base broadens significantly,” said Jens Peter Sorensen, chief analyst at Danske Bank A/S in Copenhagen. “I would suspect that there will be some hot money trying to be ahead of the curve here and buying Portugal because you still get a significant yield pick up.”

The yield on 10-year bonds in Portugal fell 27 basis points to 2.53 percent, having earlier touched 2.50 percent, the lowest since January 2016. This took the spread over comparable benchmark German bunds to 209 basis points from 237 basis points on Friday. The yield on 10-year Irish debt fell one basis point to 0.72 percent.

Portugal Yield Sets Sights on 2.22% Level After Rating Upgrade

In its statement on Ireland, Moody’s said the flexibility of the nation’s economy provided it a degree of resilience to the U.K.’s vote to leave the European Union. The outlook on the rating now stable, “supported by continued robust economic growth and a prudent policy framework that will yield further reduction in public debt,” the statement said.

Analysts at Rabobank International, headed by Richard McGuire, do not expect the upgrade for Portugal to have an immediate impact on the nation’s potential inclusion in investment-grade benchmark indexes as eligibility for these are usually based on the “average rating of the big three or the middle rating.”

Rabobank however highlights that with both Moody’s and Fitch maintaining a positive outlook on Portugal, markets should “pre-position” for another upgrade.

“The fact that Portugal is only one upgrade away from meriting inclusion in these indices argues that investors might want to position themselves in anticipation of such a development,” the analysts wrote in a client note released Monday.

— With assistance by Joao Lima

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