Maybe Markets Shouldn’t Be So Scared of ECB Tapering After All
Portugal’s upgrade by S&P is an unexpected positive step
For markets fretting about a world with less central-bank stimulus, tiny Portugal has given a hint that it might not be that bad after all.
In a surprise move, Standard & Poor’s upgraded Portugal, one of the countries hit hardest by the eurozone crisis, back into investment-grade territory Friday. The move to triple-B-minus was especially unexpected since S&P’s rating outlook had been set at stable, rather than positive, before Friday’s decision. What’s significant about the timing is that S&P’s upgrade comes despite the likely reduction in ECB bond purchases in coming months.
That marks a striking reversal. As recently as last year, the key question for Portugal was whether DBRS, another ratings firm, might be the last to remove its investment-grade rating on the country, making Portuguese bonds ineligible for ECB purchases. Fast forward, and in fact, the ECB has already been cutting back on Portuguese purchases, due to the limits of its purchase program, yet with no ill effect. In August, the central bank bought just €400 million ($478 million) of Portuguese debt, versus a peak of €1.4 billion in May 2016, S&P noted.
Meanwhile, Portugal’s 10-year yield has been plummeting, and fell by another 0.3 percentage point Monday, a big decline, to 2.5%. It was above 4% as recently as March. Not including Monday’s gains, Portuguese government bonds have returned 8.2% this year, according to Bank of America Merrill Lynch indexes.
Importantly, Portuguese bonds are benefiting from stronger economic data. Gross domestic product expanded 2.9% in the second quarter from a year earlier. Unemployment has fallen to 9.1%, back in line with the overall eurozone rate, from a peak of 17.5% in 2013.
It may be difficult to apply Portugal’s experience to other eurozone countries. As a relatively high-yielding issuer, it has benefited from rising risk appetite this year, while other bigger markets have probably gained greater support from continued ECB purchases. But as a sign that the ECB might matter less than feared for bond-market performance, Portugal’s path is an encouraging one.