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

Fri Jan 10, 2014 7:36am EST

Related Topics

* Hopes of positive Portugal ratings outlook fuel demand

* Moody's decision due later in day, S&P on Jan. 17

* German Bunds rise on UK data, before U.S. jobs report

By Emelia Sithole-Matarise

LONDON, Jan 10 (Reuters) - Portuguese bond yields slipped nearer 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 say when they will review a country's rating.

Standard & Poor's will release its assessment on Portugal on Jan. 17. While many market participants say an upgrade of Portugal from "junk" status is 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 last marginally lower at 5.41 percent as the market paused for breath after a fall of 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 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.

NOT IRELAND

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

The cost of insuring against a Portuguese default has also collapsed from eye-watering levels two years ago. It now costs $290,000 annually to buy $10 million of protection against a Portuguese default using a five-year credit default swap contract, compared with $1.5 million two years ago, according to CDS prices from provider Markit.

Lisbon is keen to take advantage of benign market conditions to demonstrate it can access markets before it follows Dublin and exits its international bailout programme 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.

"Portugal is not Ireland. It still in our view has a lot more reforms to do to become as flexible and open an economy as Ireland," said Justin Knight, a strategist at UBS.

"From a market perspective it would be prudent to have a precautionary credit line because what you don't want to see is Portugal make a clean exit in the same way that Ireland has, and then six months down the line having to get a precautionary line... The signaling of that would be very bad for the market."

Elsewhere, the German Bund future was up 19 ticks at 139.75 with 10-year yields 1.5 bps down at 1.89 percent after below-forecast UK industrial and manufacturing output data.

Safe-haven bonds also won support from ECB President Mario Draghi's clearest outline yet of what could trigger further monetary easing, though the gains were capped before the U.S. jobs report.

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