* Portuguese 10-year bond yield slides; Spanish yields flat
* On track for biggest one-day fall since late June
* DBRS to review Portugal's rating on Oct. 21
(Updates prices, adds comments)
By Dhara Ranasinghe
LONDON, Oct 10 Portugal's 10-year bond yield
tumbled on Monday and was on track for its biggest one-day fall
since late June after comments from the country's finance
minister helped soothe concerns about a DBRS ratings review less
than two weeks away.
DBRS told Finance Minister Mario Centeno on Friday that it
is "totally comfortable" with Portugal's fiscal position, an
evaluation that the minister said bodes well for the country to
keep its only investment grade rating.
The remarks helped trigger a fall of more than 10 basis
points (bps) in 10-year Portuguese bond yields, which
outperformed their southern European peers
as well as top-rated Bunds.
The heavily indebted, slow-growing southern European economy
needs to maintain at least one investment grade rating from a
major agency to keep its position in the European Central Bank's
(ECB) bond-buying scheme.
DBRS warned in August that pressures were building on
The agency is due to review its BBB (low) rating with a
stable outlook for Portugal on Oct. 21.
"Portugal's finance minister is trying to soothe markets
about the DBRS review, but there is still a tail risk about the
outlook being changed," DZ Bank strategist Christian Lenk said.
"A downgrade in the outlook is the worst case scenario."
A downgrade could cause havoc for Portugal's borrowing costs
and its banks which rely heavily on the ECB's funding, a concern
that pushed Portuguese bond yields up about 28 basis points by
the end of September - the biggest monthly rise since June 2015.
But Friday's comments from the finance minister helped push
10-year bond yields down as much as 13 bps to 3.47 percent
That pushed the yield further away from a more than
three-month high around 3.63 percent and put it on track for its
biggest one-day fall since June 28, according to Tradeweb data.
In addition to the comments on DBRS, Portugal is not
expected to sell any bonds this week and news at the weekend
that China is to encourage more investment in the peripheral
European country helped boost sentiment.
China will encourage more of its companies to invest in
Portugal in areas such as finance, insurance, health care and
infrastructure, President Xi Jinping has told the visiting
Portuguese Prime Minister Antonio Costa.
Portugal's government is due to present a draft budget to
parliament on Friday - the next big focus for markets ahead of
the DBRS review.
"The crucial point is yet to come and that's Friday's draft
budget," Commerzbank interest rate strategist David Schnautz
said. "It's likely to be a ratings friendly budget."
Portugal's government is aiming for a deficit of 2.5 percent
of gross domestic product this year after posting a gap of 4.4
percent in 2015, missing a target agreed with the European
Portuguese bonds were the clear outperformer in broader
euro zone bond markets where yields were flat to a 2 bps higher
on the day.
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(Editing by Louise Ireland)