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Portugal’s Bond Upgrade Victory Looks Like a Shallow One

Page created: Monday, 18 December 2017 14:32 GMT

Thematic
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Bonds  Fitch

Portugal’s economic recovery has received the all-important investment-grade stamp of approval from a second major ratings company. Fitch Ratings’s double upgrade removes its junk status and follows S&P Global Ratings’s one-notch move in September.

It’s the first time that a ratings company has seen fit to award Portugal a double notch upgrade. This will allow Portugal back into some, but not all, of the major bond indexes.

 Fitch says Portugal’s debt profile is on a “firm downward trend,” and expects its ratio of debt to gross domestic product to narrow a whopping three percentage points to land below 127 percent this year. That would be the first such step down since 2011, when it was forced into a 78 billion-euro ($92 billion) bailout. To call a drop of that size, to a ratio that high, worthy of an investment-grade rating is nothing short of heroic.
 The rally in 10-year Portuguese bonds has nevertheless sealed its star-performer status this year, and its yields are even below Italy’s. But there is a danger that all the good news has been priced in — which leaves investors vulnerable since a lot of the outperformance is due to the relative shortcomings of its peripheral peers.