Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Euro crisis over, Portugal's investment grade comeback cuts bond yields

Published 09/18/2017, 07:46 AM
Updated 09/18/2017, 07:50 AM
© Reuters.  Euro crisis over, Portugal's investment grade comeback cuts bond yields

© Reuters. Euro crisis over, Portugal's investment grade comeback cuts bond yields

By Dhara Ranasinghe

LONDON (Reuters) - Portugal's 10-year bond yield hit its lowest level since January 2016 on Monday, driven by the country regaining an investment grade credit rating after 5-1/2 years, effectively drawing a line under its debt crisis.

Standard & Poor's on Friday became the first of the big three credit rating agencies to lift Portugal back to investment grade, citing its improving economy and public finances.

Portugal lost the investment grade rating, which widens the investor base for a country's bonds, at the height of its debt crisis in January 2012.

Standard & Poor's, which had rated the country at BB+ with a stable outlook, shifted its position by one notch to BBB-, the lowest investment grade mark, again with a stable outlook.

With the exception of Greece, which is still in a bailout program, and Cyprus, all euro zone member states are rated investment grade by at least one of the big three rating firms.

Since ratings agencies often change the outlook on a country before they change the ratings, S&P's move took markets by surprise. Investors reacted by pushing shares and bond prices -- which move in the opposite direction to the yield -- up sharply.

"The ratings upgrade is a move we agree with -- it is clear that the economy has recovered significantly and progress made by policy makers has been beneficial to the recovery," said Peter Chatwell, head of euro rates strategy, at Mizuho.

Portugal's 10-year bond yield slid over 25 basis points to 2.51 percent <PT10YT=TWEB>, its lowest level since January 2016.

The yield was on track for its biggest one-day fall since February 2016 and was by far the biggest outperformer in euro zone bond markets.

Graphic for Portugal's 10-year bond yield slides: http://reut.rs/2jCU57h

Spanish and Italian yields fell 3-4 basis points each <ES10YT=TWEB> <IT10YT=TWEB>, dragged down by Portugal, while most other yields were flat to a touch lower <DE10YT=TWEB>.

The sharp drop in Portuguese yields left the gap over top-rated German Bund yields <DE10YT=TWEB> at around 209 basis points, its tightest level since January 2016.

Portuguese stocks also outperfomed their peers with the PSI 20 (PSI20) up 1.5 percent. Financials provided the biggest lift to the index, with Bank BCP Millenium (LS:BCP) up 6 percent.

NEXT STEP?

The upgrade is likely to attract more portfolio investment and has sparked speculation about Portugal's inclusion in major investment grade bond indices.

"Now the markets are looking at a formal entry into bond market indices and some of these need two investment grade ratings," said Patrick O'Donnell, an investment manager at Aberdeen Asset Management.

"At this stage, we're getting close to pricing that reflects a return to these indices."

Portuguese government bonds have been among the euro zone's best performing markets this year, marking a turnaround from jitters about Portugal's rating outlook at the end of last year.

An economic recovery and efforts to lower the country's budget deficit have boosted sentiment -- just as the positive impact of the European Central Bank's asset-buying program is subsiding.

Lisbon last year chalked up its smallest budget shortfall since 1975, and in June the European Council ended a disciplinary process against Portugal, which only emerged from a three-year international bailout in 2014, over its excessive deficit.

"There are investors who simply could not buy Portuguese debt before (the upgrade) due to investment rules, even when it behaved strongly in terms of returns," Portuguese Finance Minister Mario Centeno told Reuters.

"And now they will be able to buy it, which is very good as it is will be a decisive help toward the ongoing government effort of diversifying the investor base."

Graphic for Euro zone bond market returns 2017: http://reut.rs/2xKwwiP

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.