Portuguese bond yields to climb further as ECB nears limits

Portuguese government bonds rallied last week, but we doubt that this will continue. Sooner or later, we think that concerns about the sovereign credit rating and falling ECB asset purchases will push Portugal’s bonds yields higher. Our end-2017 forecast for the 10-year yield is 4.50%.  there are several reasons why we expect yields to resume their upward trend. The first is that investors are concerned about a possible credit rating downgrade by DBRS. The ratings agency’s next review of Portugal will be on 21st April. If it were downgraded, Portugal’s bonds would no longer be eligible for purchase under the ECB’s QE programme. That said, DBRS’ rating outlook for Portugal is ‘stable’, perhaps suggesting that a downgrade is unlikely. Nevertheless, that outlook might be revised down to ‘negative’, bringing a full rating downgrade closer and pushing yields up further.