Portuguese bond yields rose back above 3 percent on Monday after Fitch revised the country's rating outlook to stable from positive, in a move which may prompt investors to ask for higher returns at a bond auction later this week. Fitch affirmed Portugal's rating at BB+, one notch below investment grade, but the outlook change suggests it will take longer than previously expected for Lisbon to get rid of the "junk" status that keeps index-tracking investors away.
The ratings agency cited last year's off-target fiscal performance and similar budget risks in 2016. Fiscal concerns have been a key reason why Portugal was singled out by investors as a weak link within the euro zone during a sharp sell-off of risky assets in February, which brought back memories of the bloc's 2011-2012 debt crisis.
Portugal's bonds have since recovered, boosted partly by data showing global growth worries may have been exaggerated and relief that the new Socialist government tightened its budget plan last month after pressure from the European Commission. Ten-year Portuguese bond yields were up 3.5 basis points at 3.01 percent, up from last week's one-month lows of 2.85 percent but still well off mid-February's high of 4.38 percent.
"Fitch is making it quite clear that a move back to the investment grade universe is not really on the cards, which is understandable," said DZ Bank rate strategist Christian Lenk. An early Monday dip in yields suggested markets were taking the rating decision in their stride, but investors soon began selling the bonds to make room for the 1.0-1.25 billion euros of five- and 10-year bonds to be auctioned on Wednesday.
Most other euro zone bond yields were 2-4 basis points lower as investors anticipated the ECB would cut its deposit rate on Thursday by at least 10 basis points to minus 0.40 percent and ramp up its 60 billion euros a month asset purchase programme. Spanish 10-year yields were flat at 1.58 percent.
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