March 13, 2019 / 8:55 AM / in 12 days

Portuguese yields hover near historic lows ahead of auction

* Portugal to sell seven-, 10-year bonds before ratings review

* Italy, Germany also hold bond auctions Wednesday

* Brexit uncertainty supports safe-haven debt

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Dhara Ranasinghe

LONDON, March 13 (Reuters) - Portugal’s 10-year bond yield remained near its lowest in at least 25 years on Wednesday, before a bond auction that comes against a backdrop of improved sentiment towards the European Union periphery and speculation about a ratings upgrade this week.

Brexit uncertainty continued to drive broader bond markets. Yields on 10-year German bonds, viewed as one of safest assets in the world, were close to last week’s, the lowest in over two year lows. Italian yields rose, reflecting the general risk-off sentiment in world markets.

Portugal is scheduled to sell between 1 billion and 1.25 billion euros of seven and 10-year government bonds later in the day.

Analysts said the bond sale couldn’t come at a better time. Last week, the European Central Bank put off rate increase and offered a fresh round of cheap loans to banks, sparking an outperformance of southern European bond markets.

In addition, Portugal has benefited from talk that S&P Global may lift the country’s ratings at a review on Friday. S&P rates Portugal BBB- with a positive outlook.

Portugal’s 10-year bond yield was up just a basis point in early trade at 1.35 percent. It fell to 1.308 percent on Tuesday, its lowest in at least 25 years.

At around 124 bps, the gap between Portuguese and higher-rated German bonds is close to its tightest since last May. The Spanish/Portuguese 10-year spread, meanwhile, is nearing just 10 bps.

“The long-end outperformance suggests that markets are increasingly looking for an upgrade by S&P to BBB this Friday,” said Michael Leister, a rates strategist at Commerzbank.

Following the ECB’s dovish stance last week, analysts said they expected bond spreads to tighten further in southern Europe over Germany.

“I can see why the central bank has done what it has. There is a lot of uncertainty out there,” said David Vickers, a portfolio manager at Russell Investments in London. He said he expected a turnaround in data in the months ahead.

One key element of uncertainty is Brexit. British lawmakers voted down on Tuesday Prime Minister Theresa May’s EU proposed agreement on terms for leaving the EU. Parliament must now decide whether to back a no-deal Brexit or seek a last-minute delay.

Against this backdrop, Germany’s 10-year bond yield was just 0.06 percent, close to its lowest since late 2016.

Reporting by Dhara Ranasinghe, editing by Larry King

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