March 15, 2019 / 9:00 AM / 2 months ago

CORRECTED-Portuguese rating action in focus as market pins hopes on softer Brexit

(Corrects para 13 to say five-year Portuguese bond yields trading close to, not inside, Spanish yields. Removes erroneous chart)

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Virginia Furness

LONDON, March 15 (Reuters) - Core euro zone government bond yields held lower on Friday after British lawmakers voted to delay a potentially chaotic exit from the European Union, with attention now turning to a potentially key ratings decision for Portugal.

Global markets drew some relief overnight with European stocks rising to a five-month high, boosted by strength in the banking sector after Britain’s parliament also rejected a disorderly Brexit the day before in a week of high-stakes votes.

The market is now trading on expectations of a “softer” Brexit and the receding likelihood of no deal, analysts say.

“The last few days haven’t been the worst for the PM,” said Lyn Graham-Taylor, rates strategist at Rabobank. “She is almost backing her eurosceptic wing into a corner.”

“We have seen a risk on trade for Brexit in the last couple of days as the market thinks it is less likely we will leave without a deal.”

German 10-year government bond yields nudged down around 1 basis point in early trade to 0.076 percent, while other core euro zone bond yields were also about a basis point lower.

Ratings agency action is once again in focus with Moody’s and Standard & Poor’s set to review their credit ratings of Italy and Portugal.

“No news will be good news for Italy, but not for Portugal,” wrote Commerzbank analysts in a note.

Portuguese yields held near to historic lows ahead of the S&P review on Friday. Portugal could be on course for an upgrade to its BBB- with a positive outlook rating from S&P.

Once a pariah of euro zone debt, 10-year Portuguese government bonds are now trading only 10 basis points wider than those of higher rated Spain, the tightest spread for at least 25 years. Portugal is Baa3/BBB-/BBBv with Spain at Baa1/A-/A-.

Portuguese 10-year government bond yields fell to their lowest level for at least 25-years after the European Central Bank announced a new round of cheap loans to bank’s at its monthly meeting last week.

In fact, five-year Portuguese bond yields are now trading close to their Spanish counterparts.

Moody’s will publish an update to its Baa3 rating for Italy having lowered its GDP expectation to 0.5 percent or lower for Italy last month. Commerzbank analysts say that a negative outlook for Italy is “distinct risk”.

The spread of Italian 10-year debt over top-rated Germany was 240 basis points in early trade, having touched highs of close to 300 basis points on February 8.

Elsewhere, the Bank of Japan maintained its current easing framework and guidance, though downgraded its economic outlook, adding to the narrative of dovish central bank policy globally.

The Bank of Japan kept monetary policy steady on Friday but tempered its optimism that robust exports and factory output will underpin growth, a nod to heightened overseas risks that threaten to derail a fragile economic recovery.

Reporting by Virginia Furness; Editing by Alison Williams

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