Euro crisis over, Portugal’s investmentgrade comeback cuts bond yields

LONDON: Portugal’s 10- year bond yield hit its lowest level since January 2016, driven by the country regaining an investmentgrade 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.

It raised its rating to BBB-, the lowest investment grade, with a stable outlook, from BB+, with a stable outlook.

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

With the exception of Greece, which is still in a bailout programme, and Cyprus, all euro zone member states are now 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 up stock and bond prices, - which move in the opposite direction to the yield.

“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 as much as 35 basis points to 2.45 per cent, 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.

The drop dragged the gap over top-rated German Bund yields below 200 basis points for the first time since December 2015.

Spanish yields fell 2 basis points, dragged down by Portugal, and the Italian and Irish equivalents were flat higherrated bond yields were 1-2 basis points higher on the day.

Portuguese stocks also outperfomed their peers with the PSI 20 up 1.5 per cent.

Financials provided the biggest lift to the index, with Bank BCP Millenium up 6 per cent.

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.” — Reuters