Portugal yields hover near 7-month lows ahead of ratings report

Fri Jan 10, 2014 4:39am EST

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By Emelia Sithole-Matarise

LONDON, Jan 10 (Reuters) - Portuguese bond yields hovered near seven-month lows on Friday after Lisbon's first 2014 debt sale drew solid demand and ahead of a potential upgrade of the country's ratings outlook later in the day.

Moody's announces its decision on Portugal's credit standing later on Friday under a new EU-regulated schedule of rating reviews. Earlier, S&P affirmed Germany's triple-A sovereign ratings and left them on a stable outlook.

New European Union rules came into force this month making credit agencies operating in Europe to say when they will review a country's rating.

Standard & Poor's will release its assessment on Portugal on Jan. 17 and while many market participants say an upgrade of Portugal's "junk" status was unlikely, they expected both Moody's and S&P to raise their outlooks.

This, combined with the European Central Bank's ultra-easy accommodative monetary policy - affirmed on Thursday - has fueled demand for the euro zone's higher-yielding bonds, enabling Portugal, Ireland and Spain to successfully launch their first 2014 debt sales this week.

Portuguese 10-year yields were marginally up at 5.45 percent as the market paused for breath after a fall of almost 70 basis points so far this year and before the Moody's decision and U.S. jobs data. Analysts see scope for further falls in the yields.

"It's a bit much to expect an upgrade (of Portuguese ratings) from "junk" but there must be some scope for Moody's to upgrade its outlook from stable to positive which may add some modicum of additional support to the bullish momentum in Portugal," said Rabobank strategist Richard McGuire.

Portugal's 10-year debt premium over benchmark Germany has fallen almost one percentage point since the end of December to 355 basis points, a far cry from the over 1,500 basis points scaled at the height of the debt crisis in early 2012.

NOT IRELAND

Lisbon is keen to take advantage of benign market conditions to demonstrate it can access markets before it follows Dublin and give up its international bailout support as planned in mid-year.

Many analysts, however, doubt Portugal can manage for now without some sort of precautionary back-up lending programme, unlike Ireland which made a 'clean exit' from its bailout.

"It is by no means certain that Portugal will be able to go it alone when it leaves the tight embrace of the troika, as Ireland did in December last year," said Gavan Nolan, a credit derivatives analyst at data provider Markit.

"It might even need a second bailout, though the more likely scenario is that it will request a precautionary credit."

Elsewhere in the market, the Bund future was up 9 ticks up at 139.65 after ECB President Mario Draghi clearly spelt out what could trigger further monetary easing though the gains were capped before the U.S. jobs report.

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