LONDON, Aug 22 (Reuters) - Portugal's 10-year bond yield edged back from a three-week high on Monday after the country passed a ratings test that soothed concerns it could be on the brink of a potentially catastrophic downgrade.
The move marked a modest recovery from last week's biggest jump in bond yields seen in nearly four months after DBRS, the agency that holds the only investment grade rank Lisbon needs to qualify for the ECB's bond-buying scheme, hinted that it could be on the brink of a downgrade.
Those comments had thrust the focus on a routine review by another agency Fitch on Friday, which already rates Portugal in junk territory, as investors waited to see if they saw the same pressures building on Portugal's rating as DBRS had flagged.
In the end, Fitch affirmed its BB+ ranking with a stable outlook, although their comments that Lisbon's economic growth continued to disappoint kept some analysts cautious.
"Despite the rating affirmation by Fitch on Friday we affirm our cautious stance in Portuguese government bonds," Commerzbank strategist David Schnautz said.
Lisbon's benchmark 10-year yield fell 5 basis points, edging back below 3 percent and recovering from a three-week high of 3.08 percent hit on Friday. Yields had hit a five-month low of 2.69 percent at the start of the week.
That marked the biggest weekly jump in yields seen since early May, surpassing a surge seen in the wake of Britain's vote to leave the European Union in June which dealt a fresh blow on the outlook for global growth.
Portugal's bonds outperformed others in the euro zone on Monday, with benchmark German equivalents edging down 1 bps to minus 0.06 percent, according to Tradeweb.
Strategists said mounting expectations that the head of the U.S. Federal Reserve may signal tighter monetary policy in a speech on Friday should prevent yields from falling further.
U.S. 10-year yields hit a two-week high of 1.60 percent earlier on Monday, after Fed Vice Chairman Stanley Fischer gave a generally upbeat assessment of the U.S. economy's current strength, saying the job market was close to full strength and still improving.
His comments chimed with those of New York Fed President William Dudley last week, raising the prospect of a near-term hike even though minutes of the Fed's last meeting showed the rate-setting committee spilt on the matter.
For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Editing by Andrew Heavens)