LONDON: Portugal's government bond yields held just above six-week lows on Friday, with analysts expecting Lisbon to survive a crucial ratings review and keep its place in the European Central Bank's asset purchase scheme.
Canadian ratings firm DBRS will review Lisbon's last investment-grade rating after markets close. ECB President Mario Draghi confirmed on Thursday that if the country were downgraded it would fall out of the quantitative easing programme.
As the rules dictate Portugal must be informed of the results a day before, analysts at Commerzbank said that if, as expected, Lisbon announces an auction for next week on Friday it would be a clear sign the country has avoided a cut.
Investor angst over the decision has receded in recent weeks anyway, with the promise of budget deficit cuts in 2017 and renewed vows of left-wing support for Portugal's government.
The government is also optimistic that DBRS will recognise its fiscal effort and keep the rating steady.
Portugal's 10-year bond yield was flat on the day at 3.23 percent, having hit a six-week low of 3.16 percent on Thursday, according to Tradeweb.
German 10-year bond yields -- the euro zone benchmark -- were up 1 bps at 0.01 percent after a brief dip below zero on Thursday.
While there appears to be a broad consensus among analysts and investors that Portugal will dodge a downgrade, a change in its rating outlook from stable to negative is seen as possible.
"We expect the trend to be lowered to negative, which should cap the upside in Portuguese government bonds medium-term, and we stick with our cautious strategic stance," Commerzbank strategist David Schnautz said.
If DBRS cuts the outlook it would mean a greater likelihood of a rating cut at the next review in six months' time.
Warnings by DBRS in August of risks to Portugal's creditworthiness, mainly from slowing growth and weakness of the banking sector, coupled with concerns over rising friction between Lisbon and Brussels over its budget plans have spooked markets in recent months.
Ten-year yields rose from around 2.70 in August to an eight-month high of 3.61 percent in early October, before edging back down to current levels.
Commerzbank said that yields should fall back to around 2.8 percent if Lisbon survives the review, while some investors have warned yields could rise as much as 200 basis points if it is downgraded.
Without access to the programme, many analysts fear Portugal would face a debt crisis and need a new bailout.
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