LONDON: Portuguese government bond yields were set on Tuesday for their biggest daily rise since Britain's vote to leave the European Union, after rating agency DBRS told Reuters pressures were building on the country's creditworthiness.
DBRS's view is closely watched because it is the only one of the four agencies recognised by the European Central Bank to give Portugal the investment grade rating it needs to qualify for the central bank's quantitative easing scheme.
Portuguese 10-year yields rose 14 basis points to 2.85 percent, the biggest daily rise since June 24 when the results of the UK's Brexit vote sent shockwaves through markets.
The rise in Portuguese yields hauled other euro zone equivalents higher, with benchmark German bond yields reversing an early fall to hit a near one-month high of minus 0.04 percent .
"DBRS have flagged that they have some concerns about Portugal, and that has started a bit of a sell-off which has radiated elsewhere in the euro zone," Commerzbank strategist David Schnautz said. DBRS is next due to review Portugal's rating on Oct. 21.
Italy, which is also in DBRS's line of vision, also saw the yield on its 10-year bond rise sharply on the day, by 6.2 bps to 1.13 percent. DBRS said earlier this month it was placing Italy under review, casting doubt over the country's last "A" grade rating from a major agency.
"People are worried about Portugal and Italy because DBRS is again in the headlines," said Jaime Costero, interest rates strategist at BBVA.
"For Portugal this is because it could mean they are not eligible any more for quantitative easing and for Italy because the government bonds would suffer a sharp increase in the haircuts applied when posted as collateral in the ECB open market operations," he said.
It would mean Italian banks would not have access to the cheapest funding from the ECB. Reuters calculations showed they would need to provide, on average, an extra 8 percent in collateral to maintain the current amount of ECB funding.
A comfortable round of quantitative easing by the Bank of England may have also put some upward pressure on euro zone bond yields.
Investors offered the BoE 3.124 billion pounds ($4.05 billion) of British government bonds with a duration of more than 15 years, 2.67 times the 1.17 billion pounds purchased by the bank.
Last week, the central bank failed to find enough willing sellers to meet its purchase target for the first time since it started buying government bonds to boost Britain's economy in 2009.
This pushed euro zone bond yields down as investors worried about whether the ECB would be faced with a similar situation when executing its asset purchase programme.
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