LONDON: Portugal's 10-year government bond yield rose towards its four-month high on Friday, before a credit-rating review that could lead to Lisbon's ejection from the European Central Bank's asset-purchase programme.
Other euro zone bond yields fell as falling commodity prices fuelled expectations of low inflation and further easing by the ECB next month. But in Portugal the market was waiting for a review by Canadian ratings agency DBRS later on Friday.
Left-wing parties ousted Portugal's ruling centre-right on Tuesday, and analysts say that raised the risk of a downgrade by DBRS.
A downgrade would deprive Portugal of its last investment- grade rating, leaving its debt ineligible for purchases under the quantitative easing programme.
"We are definitely getting worried about Portugal, but not enough at this time to exit our position," said Jack McIntyre, portfolio manager at Philadelphia-based Brandywine Global Investment Management, who holds Portuguese government bonds.
Ten-year Portuguese yields rose 1.5 basis points to 2.80 percent, heading towards Monday's four-month high of 2.93 percent and widening the gap with 10-year German bond yields to levels last seen four months ago.
Portuguese yields have risen about 50 bps since inconclusive election results on Oct. 4, a sign that some investors have turned bearish.
"I'm absolutely sure that hedge funds are positioning themselves in view of the Portuguese situation, getting ready to short-sell," said Pedro Azevedo, the CEO of Portugal's Lynx Asset Managers, whose firm manages 203 million euros in assets, including a small portion of Portuguese debt.
In Spain, the gap between Catalonian bond yields and benchmark Spanish debt widened by about 5 bps after Fitch Ratings on Thursday downgraded Catalonia's credit rating. Most euro zone bond yields fell, underpinned by expectations of further easing by the ECB, possibly next month. Germany's 10-year Bund yield dropped 2.8 bps to 0.58 percent.
The yield on 10-year Greek bonds fell 11 bps to 7.33 percent - its lowest level since last December. "A major trigger over the last day has been the low oil price and the fall in commodity prices, which is fuelling the rate-cut speculation," said Alexander Aldinger, a rate strategist at Bayerische Landesbank.
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