March 15, 2019 / 12:02 PM / 6 months ago

Market pins hopes on softer Brexit; Portuguese rating in focus

LONDON (Reuters) - Core euro zone government bond yields edged higher on Friday, after British lawmakers voted to delay a potentially chaotic exit from the European Union, while attention turned to ratings decisions for Portugal and Italy.

FILE PHOTO - The financial district of La Defense with the Arche, the headquarters of Areva, Societe Generale and Edf is seen during sunset near Paris, France, March 5, 2019. REUTERS/ Christian Hartmann

Markets are now trading on expectations of a “softer” Brexit and the receding likelihood of no deal, analysts said.

“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,” said Lyn Graham-Taylor, rates strategist at Rabobank.

German 10-year government bond yields rose slightly to end the day around 0.09 percent. Other core euro zone bond yields were about a basis point higher.

Euro zone inflation rose as expected in February, the EU’s statistics office said on Friday, mainly because of more expensive services, food, alcohol and tobacco.

Credit rating agencies Moody’s and S&P Global were set to review their ratings of Italy and Portugal respectively after the market close.

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

Portuguese yields held near historic lows before S&P’s review, which could see the country upgraded from the lowest investment-grade rating of BBB-.

Once a pariah of euro zone debt markets, 10-year Portuguese government bonds are now trading only 10-11 basis points wider than those of higher-rated Spain, at the tightest spread for at least 25 years. Portugal is rated Baa3/BBB-/BBB by Moody’s, S&P and Fitch Ratings, with Spain at Baa1/A-/A-.

Spanish/Portuguese 10-year yield gap tightest in at least 25-years -

Moody’s will review its Baa3 rating for Italy after last month lowering its forecast for the country’s gross domestic product growth to 0.5 percent or lower. Commerzbank analysts say that a negative outlook for Italy is a “distinct risk”.

The spread of Italian 10-year debt over top-rated Germany was 241 basis points on Friday, having touched highs of close to 300 basis points on Feb. 8.

Elsewhere, the Bank of Japan maintained its current easing framework and guidance but downgraded its economic outlook on Friday, joining the ranks of dovish central banks.

Reporting by Virginia Furness; editing by Larry King and Kirsten Donovan

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