Portuguese yields dip as Lisbon pledges "clean" bailout exit

Mon May 5, 2014 11:13am EDT

* Portugal says to exit bailout without back-up loan

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

* Slovenian yields rise after prime minister resigns

By Emelia Sithole-Matarise

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

Like Ireland, which in December became the first euro zone country to exit a bailout, 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 brighter prospects contrast with smaller euro zone member Slovenia, whose yields have risen since Prime Minister Alenka Bratusek resigned after losing her party's leadership 10 days ago.

Portuguese 10-year bond yields fell 2 basis points to 3.61 percent, matching their lowest since 2006, according to Reuters data. The bonds outperformed their euro zone peers in thin trade due to a holiday in Britain - Europe's busiest financial centre.

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 and brave move and probably the right thing to attempt," said David Keeble, global head of fixed income strategy at Credit Agricole in New York.

"It makes it look like normality. If you look (at the moves in the market) ... so far it's been a vote of confidence."

The country held its first bond auction in three years successfully last month, paying a record low yield. It is now fully funded for the year and pre-funding for 2015.

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

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 might 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, whose rating is the lowest at 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 strategists 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 defend current PGB (Portuguese Government Bond) yield levels but should also open the door for another leg lower," Commerzbank said.

Slovenian 10-year bond yields rose 9 bps to 3.55 percent after Bratusek's resignation as premier paved the way for early elections. Bratusek, whose government narrowly averted an international bailout last year, said she hoped the elections would be held by the summer.

Analysts said the political uncertainty may slow or even halt plans to sell off state assets but said Slovenia was unlikely to need outside financial help for now. (Additional reporting by Marius Zaharia; Editing by Ruth Pitchford)

FILED UNDER:
A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article