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UPDATE 2-Portuguese bond yields tumble as DBRS rating fear fades
October 10, 2016 / 7:46 AM / a year ago

UPDATE 2-Portuguese bond yields tumble as DBRS rating fear fades

* 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 (Reuters) - 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 Portugal’s creditworthiness.

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 Union.

Portuguese bonds were the clear outperformer in broader euro zone bond markets where yields were flat to a 2 bps higher on the day. For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url= (Editing by Louise Ireland)

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