* Portugal's borrowing costs move higher than BB-rated
* QE changes favour short-dated bonds from higher-rated
* Possibility of DBRS downgrade hangs "like sword of
By Abhinav Ramnarayan
LONDON, Dec 20 Portugal's borrowing costs have
risen above those of a group of similarly-rated European
companies, on persistent concerns the European Central Bank will
struggle to buy Portuguese government bonds after changes to its
Governments tend to enjoy better borrowing rates than
companies with similar credit ratings as government credit is
seen as the least risky. All other borrowers pay a premium.
This effect has been exacerbated by the ECB's bond-buying
scheme, launched in March 2015 and focused on government debt.
But last week the ECB made changes to the scheme that analysts
said would see purchases concentrated on highly-rated bonds.
This graphic tmsnrt.rs/2hVdYBl shows how over 2016
the yield on Portugal's 10-year government bond
has, unusually, risen above the yield on an index of European
corporates with the same rating as the sovereign.
Portugal 10-year bond, rated Ba1/BB+/BB+ by the three main
ratings agencies, is now 13 basis points (bps) above the Reuters
index of 10-year double-B-rated European corporate bonds
By comparison, Spain's 10-year government bond
- rated BBB - yields 25 bps less than an index of triple B-rated
bonds and A-rated Ireland's 10-year bond yields 43
bps less than the single-A index.
The ECB also buys investment-grade corporate bonds under its
asset-purchase scheme, albeit in much smaller volumes.
Portugal is also rated BBB (low) by DBRS, the only agency to
make the sovereign investment grade. It maintained the rating in
"To me (the reversal) shows that the ECB support for
Portugal is no longer the same and it is now trading more
according to its rating," said Commerzbank strategist David
"The changes to the ECB's bond-buying programme leave
Portugal hanging because they don't address the specific
problems Portugal faces in terms of QE eligibility," he said.
Last week's changes will allow the ECB to buy bonds with
maturities of less than two years and bonds yielding less than
the deposit rate.
Both changes imply the ECB will concentrate its purchases on
higher-rated countries and not on the likes of Portugal, which
has a limited amount of short-dated debt and no bonds yielding
less than the minus 40 basis point deposit rate.
Concerns about Portugal's eligibility for the ECB programme
- which depends on it retaining its rating from DBRS - may also
be playing a part.
"Though the risk of a DBRS downgrade is a bit less now, the
danger always remains like the sword of Damocles," said
Christian Lenk, a strategist at DZ Bank.
(Reporting by Abhinav Ramnarayan; Editing by Jon Boyle)