January 19, 2018 / 9:30 AM / a year ago

REFILE-Spanish bonds outperform as ratings upgrade eyed

(Refiles to clarify upgrade would be first to “A” since crisis.)

* Spain/Germany yield spread at tightest in 5 1/2 months

* Other euro zone yields track U.S. Treasuries higher

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

By Abhinav Ramnarayan

LONDON, Jan 19 (Reuters) - Spanish government bonds outperformed the market on Friday on expectations of an upgrade to its debt rating to “A” for the first time since the euro zone debt crisis.

Fitch Ratings is due to review Spain’s sovereign credit rating later on Friday, and analysts expect a strengthening economy and declining political risk will lead it to upgrade the rating from “BBB+” to “A”.

That would restore the “A” rating for the first time since early 2012, the height of the euro zone debt crisis, when Spain was downgraded by all three of the main ratings agencies.

On Friday, when most euro zone bond yields were pushed higher by a move in U.S. Treasuries, Spain’s 10-year borrowing costs edged lower to 1.48 percent. That narrowed the gap between Spanish and German 10-year yields to 95 basis points, its tightest since August last year .

“We now consider that there exists a slightly higher probability that Fitch will upgrade Spain by one notch than that it will reaffirm the BBB+ rating,” said BBVA strategist Jaime Costero Denche. “It is only a question of time before all the main rating agencies upgrade their ratings on Spain.”

Moody’s rates Spain “Baa2”; S&P Global at “BBB+”.

Spanish gross domestic product grew 3.1 percent in 2017, making it one of the best-performing economies in Europe, but concern over an independence bid by the region of Catalonia, kept it from being upgraded.

U.S. 10-year Treasury yields climbed to 2.64 percent early on Friday, their highest in more than three years, as legislation to keep the federal government running ran into obstacles in the U.S. Senate late on Thursday.

Soon after, Germany’s 10-year government bond yield, the benchmark for the euro zone, rose 2 basis points to 0.53 percent, just a basis point below the 5 1/2-month high reached last week. Most other high-grade euro zone bond yields were up 1 to 2 bps.

An improving global economy and expectations of central bank tightening have been pushing up the yields of most major developed country debt. The latest trigger has been faster-than-expected Chinese growth in the fourth quarter of 2017.

“The market seems keen to test the 2.64 percent level in 10-year US Treasury yields, which has held repeatedly in recent years and is seen by some commentators as the dividing line to a bear market in bonds,” Commerzbank analysts said in a note.

Reporting by Abhinav Ramnarayan, editing by Larry King

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