(Updates with analyst comments, context)
By Dhara Ranasinghe
LONDON, Sept 30 Portugal's 10-year bond yield
was set on Friday to end September with its biggest monthly rise
since June last year, reflecting growing concerns about the
country's ratings outlook.
Jittery markets are counting down to a review on Oct. 21 by
DBRS, the last major ratings agency to give Portugal the
investment grade rating it needs to qualify for the European
Central Bank's bond-buying programme.
The ECB'S 1.7-trillion-euro asset-purchase programme has
helped keep borrowing costs low, underpinning bond markets at
times of volatility such as in the wake of Britain's vote in
June to leave the European Union.
Last month, DBRS warned that pressures were building on
Portugal's creditworthiness, stoking concern about the ratings
"We're still in the camp that DBRS is not going to
downgrade Portugal, although it could change the outlook which
effectively means Portugal loses the investment grade status
further out," said ING senior rates strategist Martin Van Vliet.
"Concerns about this have been behind the underperformance
of Portuguese bonds."
Portugal's 10-year government bond yield was
up 1 basis points at 3.33 percent on Friday, while Spanish and
Italian bond yields fell in step with other euro zone peers.
It has risen almost 27 basis points this month, setting it
up for the biggest monthly rise since June 2015, according to
A lacklustre economic performance, weak banking sector and a
coalition government at odds with the European Commission over
the budget deficit have also soured sentiment towards Portugal.
The gap between 10-year Portuguese bond yields and top-rated
German bonds rose to around 357 bps earlier this week, its
widest since February, when concerns about the health of
Europe's banking sector rattled markets.
With risk aversion and a flight-to-safety into core euro
zone bonds in play again this week on worries about Deutsche
Bank, Portuguese bonds have also suffered from a general fall in
investor appetite for risk assets.
"In a scenario where Portugal risks losing market access
(e.g. because it falls out of quantitative easing) or in a
situation of generalised risk aversion, we believe PGBs
(Portuguese government bonds)have substantial room to sell off,"
UBS said in a note published earlier this week.
(Reporting by Dhara Ranasinghe; Editing by Mark Heinrich)