Ole Hansen
Saxo Bank’s head of commodity strategy Ole Hansen considers the implications of pledges by Saudi Arabia and Russia to raise oil production despite the likes of Iran and Venezuela not backing the move.
Article / 31 August 2016 at 10:00 GMT

Weekly Bond Update: Portugal grasping at straws

Fixed Income trader / Saxo Bank
  • Portugal crisis looming as DBRS credit rating agency ponders a downgrade
  • European Central Bank would take dim view of loss of investment grade
  • Portugal can ill-afford to lose its biggest debt buyer
  • Relatively unknown DBRS may simply be enjoying its moment 'in the sun'

Beautiful Lisbon draws the crowds but the vultures are gathering as only the
DBRS credit rating agency is holding up Portugal's investment grade. Photo: iStock

By Michael Boye

Greece has long been publicly labeled as the weakest link in the Eurozone, but with its problems now in rear view mirror — at least as far as the market is concerned — fresh concerns are now surfacing over another periphery economy, namely Portugal.

The most recent winners of Euro 2016 this summer might be champions of Europe in terms of football, but in the eyes of the bond market and credit rating agencies, its fame has been withering for some time.

In fact, while all the major agencies now hold sub-investment grade ratings of the sovereign, the less familiar and much smaller DBRS agency is now the only one attaching an Investment Grade to its bonds. While investors rarely notice the opinion of this particular agency, it is vital for Portugal, as this rating is the only thing keeping it in the good graces of the European Central Bank. Lose this rating, lose your biggest debt buyer.

This could soon be a very real problem, as lately DBRS has been very outspoken in its critique of the state of the nation's finances. The issue is rather bizarre though, and you have to wonder whether this otherwise nameless rating agency is simply enjoying its time in the sun, taking advantage of this unique set of circumstances. 

Apart from the DBRS downgrade issue, the most recent worry is that the bailout of Caixa Geral which will necessitate an “amended budget” and thus potentially lead the way to another budget battle with Bruxelles.

In absolute terms, the yield levels are not alarming yet, so there is also the chance that the market might be too complacent about this. In a continuation of the too-big-to-fail paradigm, the market could be reasoning (with good reason we might add) that even if they lose this Investment Grade status, the ECB will find another excuse to keep buying Portugal bonds or ultimately bail them out.

Portugal 10 year spread is more than 100 bps wider this year..

Source: Bloomberg

But in historical context the yield is still far from the worst crisis levels…
10 year

Source: Bloomberg

In comparison though, early 2015 Portugal 10 year spread was level with Spain, but has expanded 200 bps since…
PT and SP


Source: Bloomberg

— Edited by Martin O'Rourke

Michael Boye is on the Saxo Bank fixed income desk


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer
- 沪ICP备13028953号-1

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail