November 16, 2015 / 11:45 AM / 2 years ago

Portuguese bonds rebound as Lisbon passes ratings test

* Limited market impact from Paris attacks

* Euro zone inflation revised up to 0.1 pct in Oct

* ECB rate cut fully priced in for December (Recasts and writes through)

By John Geddie

LONDON, Nov 16 (Reuters) - Portuguese bond yields fell on Monday, bouncing down from four-month highs hit last week, after ratings agency DBRS confirmed Lisbon’s investment grade status to ensure its debt remains eligible for purchase by the ECB.

Most other euro zone bond yields were flat to a touch higher on the day, as an initial flight to safe haven debt after Friday’s attacks by armed militants across Paris quickly abated.

In Portugal, ten-year yields fell 8 basis points to 2.70 percent, reversing a rise seen last week as leftist parties ousted the centre-right government, paving the way for a Socialist-led administration to end years of austerity.

The political upheaval had raised fears that DBRS might cut Portugal’s last remaining investment grade rating which it needs to qualify for the European Central Bank’s bond-buying scheme. Instead, it affirmed the BBB (low) rating with a stable trend.

Yields were more than 20 bps lower than levels hit one week ago, which were the highest seen since early July.

“There may have been a potential change in the outlook or the rating somewhat priced in, but it hasn’t come to fruition and that is why we are seeing a bit of a relief rally today,” Credit Agricole strategist Orlando Green said.

Elsewhere, yields on two-year German bonds -- the top-rated debt in the euro zone -- hit a record low of -0.38 percent in early trades but at 1100GMT were back to -0.366 percent.

It was a relatively contained reaction elsewhere in markets, with stocks recovering after an initial dip and the safe haven yen giving up gains against the U.S. dollar.

Islamic State has claimed responsibility for Friday’s suicide bombings and shootings in Paris, which also re-ignited a row over Europe’s refugee crisis. French warplanes pounded Islamic State positions in Syria on Sunday.

While the social and economic repercussions of the attacks may not yet be known, analysts had only expected a short-term impact on markets which have been buoyed by the prospect of monetary easing from the European Central Bank.

Data on Monday showed euro zone inflation was revised up to 0.1 percent in October, but it has done little to shake expectations that the ECB may deliver an interest rate cut and/or an expansion of its bond-buying programme at its meeting on Dec. 3.

Money markets are fully pricing in a 10 basis point cut in the ECB’s deposit rate. (Editing by Richard Balmforth)

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