Portuguese yields dip as Lisbon pledges "clean" bailout exit

Mon May 5, 2014 4:40am EDT

* Portugal says to exit bailout without backup loan

* Portuguese 10-year yields pinned at 8-year lows

* Rest of euro zone debt market steady in thin trade

By Emelia Sithole-Matarise

LONDON, May 5 (Reuters) - Portuguese bond yields fell on Monday after Lisbon said it would exit its international bailout programme later this month without a back-up loan, a bold step for a country that two years ago was thought to be at risk of defaulting on its debts.

Like Ireland, which in December became the first euro zone country to exit a bailout programme, Portugal aims to make a clean break from its financial support.

Lisbon has been helped by an easing of the wider euro zone debt crisis, which has spurred yield-hungry investors' appetite for the region's lower-rated government bonds.

Portugal's 10-year bond yields fell 1 basis point to 3.62 percent, their lowest since 2006, according to Reuters data, slightly outperforming other euro zone bonds in thin trade due to a holiday in Britain.

Its yields are now down to just a fraction of the near 17 percent peak they hit at the height of the debt crisis in 2012.

"It's a bold move by Portugal to move out without asking for a precautionary credit line, but the government is confident that it can get funding from the market," said ING strategist Alessandro Giansanti.

"They are already funded for this year and doing pre-funding for next. That goes alongside an improvement in periphery which is helping the smaller countries, and as long as the mood from investors remains positive for risky assets, that's helping Portuguese government bonds," he said.

The country held its first bond auction in three years successfully last month, paying a record low yield that was seen as a vote of market confidence and a boost to its chances of cleanly exiting its bailout on May 17.

The government won back investor confidence by sticking to the austerity policies and reforms required as part of the bailout it took in 2011.

The drop in its borrowing costs to multi-year lows continues a trend of sharp declines since 2012 driven by signs the euro zone crisis is abating as well as by the prospect of European Central Bank asset purchases and by Portugal's own return to economic growth and lower deficits after a brutal recession.

RATING REVIEWS EYED

Some in the market, such as Commerzbank strategists, said these improvements could prompt upgrades to the country's credit rating. All three major rating agencies - Moody's, Standard & Poor's and Fitch - have junk ratings on Portugal.

Moody's, which assigns the country its lowest rating of Ba3, and S&P are due to announce the results of their reviews of Portugal's creditworthiness on Friday.

"Reading what it would take to upgrade Portugal, we expect a one-notch upgrade with a positive outlook in our base case scenario. At the very least, Moody's should lift the outlook to positive," Commmerzbank strategist said in a note.

Fitch already has a positive outlook on Portugal and S&P is expected to follow suit.

"The prospect of Portugal at least carrying three positive outlooks by the end of the week should not just help defending current PGB yield levels but should also open the door for another leg lower," the Commerzbank strategist said.

German 10-year yields, the benchmark for euro zone borrowing costs, were steady around 11-month lows of 1.45 percent.

The market is also focusing on the ECB's policy meeting on Thursday. While it is widely expected to keep monetary policy unchanged after a tick up in euro zone inflation last month, the ECB is still implementing some form of stimulus later in the year to support fragile growth. (Editing by Hugh Lawson)

FILED UNDER: