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Portugal's borrowing costs move above corporates as ECB effect fades
December 20, 2016 / 1:41 PM / a year ago

Portugal's borrowing costs move above corporates as ECB effect fades

* Portugal’s borrowing costs move higher than BB-rated companies

* QE changes favour short-dated bonds from higher-rated countries

* Possibility of DBRS downgrade hangs “like sword of Damocles”

By Abhinav Ramnarayan

LONDON, Dec 20 (Reuters) - 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 asset-purchase programme.

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 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 October.

“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 Schnautz.

“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

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