November 11, 2013 / 5:26 PM / 4 years ago

Portuguese yields fall after Moody's raises ratings outlook

4 Min Read

* Moody's changes Portuguese rating outlook to stable

* Portuguese debt outperforms broader euro zone debt rebound

* Bunds rise after biggest one-day loss since September

By Emelia Sithole-Matarise and Ana Nicolaci da Costa

LONDON, Nov 11 (Reuters) - Portuguese bond yields fell near five-month lows on Monday, outperforming other euro zone debt after Moody's raised its outlook on the country's ratings to stable from negative.

The agency's move after European markets closed on Friday was the latest in a series of news that has helped improve the market's view on Lisbon since a government crisis sent 10-year yields back above an unsustainable 8 percent in July.

Portuguese 10-year government bond yields fell as much as 14 basis points to 5.86 percent, near troughs seen in early June. The yield gap between 10-year and two-year Portuguese bonds is near its widest since July - reflecting reduced concerns about the possibility of a debt restructuring.

"The Moody's move on Friday evening does build on a fair degree of other positive moves that the Portuguese market has enjoyed over recent weeks ... and the other thing helping has been positive newsflow on growth," said Philip Shaw, chief economist at Investec.

Other lower-rated debt also rose, with Spanish and Italian 10-year yields falling 2 basis points to 4.11 percent and 4.13 percent respectively.

Portugal has started to recover from its worst recession since the 1970s and the International Monetary Fund said on Friday it was on track with its bailout and gave the indebted euro zone country another 1.9 billion euros.

"We live in a world where there's a lot of hunger for yield and consequently against the backdrop of falling volatility and quiet newsflow it's no surprise to us to see Portuguese bond spreads moving tighter," said Mark Dowding, co-head of investment grade team at Bluebay Asset Management.

"That's clearly been benefiting our investment performance where we have adopted an overweight stance," said Dowding, whose team has $24.5 of assets under management and is overweight Portugal in its government bond portfolio. Bluebay is also overweight on Italy and Spain.

"Buy-Dips" Mentality

Euro zone bonds mostly rallied after a sell-off on Friday when higher-than-expected U.S. jobs numbers brought forward bets of a cut in U.S. monetary stimulus.

Last week's shock move by the European Central Bank to cut interest rates - and the stronger commitment to stimulate the economy that implies - is still supporting European debt markets. Most traders expect the ECB to pump more cheap long-term money into markets, according to a Reuters poll on Monday.

But investors are also returning to bets on the Federal Reserve scaling back its programme of bond-buying before March, after U.S. job growth unexpectedly accelerated in October. A Reuters poll after Friday's numbers showed more primary dealers were leaning toward an earlier cut in stimulus.

That is broadly bad news for top-rated government bonds. German Bund futures settled 1 tick lower on Monday at 141.01, having seen their biggest one-day loss since September on Friday. German 10-year yields were steady at 1.76 percent .

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