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UPDATE 2-Portugal's bond yields recede from 3-week high as rating fears ebb
August 22, 2016 / 10:56 AM / a year ago

UPDATE 2-Portugal's bond yields recede from 3-week high as rating fears ebb

(Updates prices, adds quote)

By John Geddie

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 yields in nearly four months after DBRS, the agency that holds Lisbon’s only investment grade rank - which it needs to qualify for the European Central Bank’s bond-buying scheme - hinted that it could be on the brink of a downgrade.

Fitch affirmed its BB+ ranking with a stable outlook, although its comments that economic growth continued to disappoint kept some analysts wary.

“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 was steady on the day at 3.03 percent, edging back 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 last week.

That marked the biggest weekly jump in yields 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 to the outlook for global growth.

Still, Portugal’s bonds continued to underperform others in the euro zone on Monday, with benchmark German equivalents edging down 3.5 bps to minus 0.08 percent, according to Tradeweb.

Other euro zone bond yields were 1-4 bps lower on the day.

“Last week’s DBRS comments highlight that Portugal is under pressure a bit and has drawn attention back to an issue that some people had forgotten about,” said Owen Callan, an analyst at Cantor Fitzgerald.

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 briefly 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 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.

For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url= (Additional reporting by Dhara Ranasinghe; Editing by Robin Pomeroy)

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