October 7, 2019 / 10:27 AM / 7 days ago

UPDATE 2-Portuguese bonds outperform after upgrade, election

* Portugal outperforms after DBRS upgrade, election

* Greece underperforms after announcing re-opening of 10-year

* Eyes on trade talks later in the week (Recasts to lead on Portugal, adds analyst comments, adds Greek reopening of 2029 bond)

By Olga Cotaga and Yoruk Bahceli

LONDON, Oct 7 (Reuters) - Portuguese government bonds outperformed on Monday after a credit rating upgrade and elections over the weekend that didn’t deliver any surprises.

The country’s ruling Socialists won parliamentary elections held on Sunday. The Socialists fell short of an outright majority, though, meaning Prime Minister Antonio Costa will need to negotiate a new deal with one or both of his far-left allies.

The election followed a credit rating upgrade from DBRS on Friday, which lifted Portugal’s rating to BBB.

“The polls did suggest the results for the elections and I don’t think markets are particularly worried about the elections, similarly with Spain,” said Pooja Kumra, European rates strategist at TD Securities.

She said the main driver of Monday’s outperformance was the DBRS upgrade, which confirms the relative strength of Portugal’s economy against euro zone peers.

Its five-year government bond outperformed; the yield fell 4 basis points to -0.27%. Its 10-year benchmark yield was down 1 bp to 0.14%.

Overall, most ten-year euro zone government bonds were up 1 basis point on Monday, with the 10-year benchmark German bond at -0.58%

Data showed German industrial orders fell more than expected in August on weaker domestic demand, more evidence that a manufacturing slump is pushing Europe’s largest economy into recession.

But this did little to move the market. “Markets have gotten used to weak data from Germany, said TD Securities’ Kumra.

She added the bad news for the German economy is now priced in, meaning every new bad data point does less to move the market.

Meanwhile, Greek government bonds underperformed, with the 10-year benchmark yield up 8 bps after the sovereign announced a syndicated re-opening of a 10-year bond it sold in March.

Yields typically rise when a new issue is announced as investors make room for new supply.

The new issue comes on the back of Greece’s draft 2020 budget that was submitted to parliament on Monday, which includes tax reform and cuts as well as increased social spending.

Greek bond yields are near record lows hit in late September.

The main geopolitical focus will be U.S.-China trade negotiations expected in Washington on Oct. 10-11.

Earlier in the session, yields fell slightly when investors weighed signs of a resilient U.S. economy against chances that trade talks may not go well.

Chinese officials have signalled they are increasingly reluctant to strike a broad trade deal pursued by U.S. President Donald Trump, Bloomberg reported.

“Everybody’s waiting for the trade talks,” said Lina Fransson, fixed income strategist at SEB. “Markets will remain cautious ahead” of them.

Friday’s closely watched non-farm payrolls report showed the U.S. unemployment rate dropped to near a 50-year low of 3.5% in September, reducing expectations interest rates would be cut this month.

Traders will also be looking at the latest Federal Reserve minutes later this week for further cues.

Fed Chair Jerome Powell reiterated on Monday the U.S. economy was “in a good place”, chugging along despite the headwinds it faces.

“Maybe this expectation of capitulation from the Fed and aggressive easing might be a little bit too aggressive,” said Peter Chatwell, head of rates strategy at Mizuho. (Reporting by Olga Cotaga and Yoruk Bahceli; Editing by Larry King and Mark Potter)

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