LONDON: Portuguese bond yields fell on Friday on expectations that credit rating agency Fitch will lift the country back to investment grade after it successfully exited its international bailout last year.
Fitch will decide after the market closes whether to upgrade Portugal from its current rating of BB+, the highest sub-investment grade category. Portuguese bonds outperformed most euro zone peers, with analysts saying investors were already positioning for a positive outcome given the economy's continuing recovery.
Ten-year yields were down 3 basis points at 1.77 percent, having hit a low of 1.75 percent earlier. Spanish and Italian equivalents a touch higher at 1.32 percent and 1.35 percent, respectively.
"We could see Portugal moved up to investment grade later today and that could produce a bit of forced buying from index trackers or some accounts may have to up their Portugal exposure.
That could also help the peripheral in general," said Commerzbank strategist Rainer Guntermann. Standard & Poor's upgraded Portugal's rating outlook to positive from stable last week, citing better growth prospects, but left the sovereign at a junk grade BB, the lowest rating assigned by any of the big three agencies.
The rally in Italian and Spanish bonds paused, with traders and analysts saying investors were wary of adding to positions ahead of the end of the quarter.
Persistent uncertainty over whether Greece's international creditors will accept reform plans submitted on Friday to unlock much needed cash was also cited. "Once quarter-end gets out of the way, then peripherals will start to renew their tightening, assuming Greece gets a short term solution," RIA Capital Markets strategist Nick Stamenkovic said. Greek officials denied a report in Germany's Bild newspaper that outspoken Finance Minister Yanis Varoufakis might resign.
Short-dated Greek yields edged up, while 10-year yields were down 11 bps at 11.04 percent. Guntermann said the prospect that up to 60 billion euros in coupon and bond redemptions -- similar to the ECB's monthly asset purchase target -- due over the coming month could be reinvested in the market could give fresh impetus to the rally.
Italy's ratings are also under scrutiny with smaller agency DBRS due to deliver its review later on Friday.
While this review by the Toronto-based firm would normally garner little attention, it is significant because any downgrade would cut 5 percent off the value of the bonds its banks use as collateral to get cheap funding from the European Central Bank.
"The consequences of a possible sovereign downgrade should not be underestimated, especially for Italian banks," said DZ Bank analyst Daniel Lenz.
Giacomo Barisone, the head of DBRS's Italy desk, told Reuters two weeks ago that the country's political situation seemed to have stabilised and it was making progress with structural reforms. He also said Italy's ratings will be supported by the ECB's government bond-buying programme.
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