Owen Callan Comments: Portugal’s Bonds Decline Amid Speculation of Rating Downgrade

 August 17, 2016, Bloomberg News Online

DBRS comments raise doubts over nation’s creditworthiness 

Portuguese 10-year bond yield reaches highest since July 29 

Portugal’s government bonds fell for a second day amid speculation that ratings company DBRS Ltd. may downgrade the nation’s sovereign debt. 

The country’s 10-year bond yield rose to the highest in more than two weeks. DBRS’s rating of BBB (low) leaves it the only major company to rank Portugal’s debt as investment grade. That’s essential for the securities to remain eligible for the European Central Bank’s asset-purchase program. 

Fergus McCormick, chief economist and co-head of sovereign ratings at DBRS, said in an interview with Reuters on Tuesday that Portugal’s recent gross domestic wwwuct data raised concerns over its growth prospects. DBRS is due to review its rating on Oct. 21. 

“There will be a fear that if DBRS were to downgrade them into junk territory that will cause problems with regards to access to QE, access for collateral,” said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP. “That is why Portugal has sold off.” 

Portuguese 10-year bond yields rose 10 basis points, or 0.1 percentage point, to 2.94 percent as of 12:57 p.m. London time, after reaching 2.97 percent, the highest since July 29. The 2.875 percent security due in July 2026 fell 0.875, or 8.75 euros per 1,000-euro ($1,127) face amount, to 99.425. The yield climbed 15 basis points on Tuesday, the biggest increase since June 24. 

Debt Returns 

Portugal’s sovereign securities earned 2.1 percent in the past month through Tuesday, according to Bloomberg World Bond Indexes. That compares with an average return of 0.7 percent from euro-area government debt and 0.2 percent from German bonds. 

While DBRS is smaller than Moody’s Investors Service, S&P Global Ratings and Fitch Ratings, its rankings on Portugal and Italy are significant because they’re higher than the other three companies and used by the ECB for grading collateral for its liquidity operations. 

A ratings downgrade means banks in those nations would be charged more by the ECB for accepting those lower-rated securities as collateral for loans.