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Ratings warning pushes Portuguese bond yields higher for second day

Portugal's 10-year government bond yield rose sharply for a second straight day on Wednesday, hitting its highest in almost three weeks after a warning from credit agency DBRS on the country's rating.

DBRS told Reuters on Tuesday that pressures were building on Portugal's creditworthiness as a low-growth economy battles to contain high debt levels and contends with strains in the banking sector.

It is the only one of the four agencies recognized by the European Central Bank to give Portugal the investment grade rating it needs to qualify for the central bank's quantitative easing scheme.

PEDRO NUNES | AFP | Getty Images

Portugal's 10-year bond yield rose 12 basis points to 2.99 percent, taking its increases over the past two days to almost 30 bps. On Tuesday, yields posted their biggest daily rise since Britain's vote in June to leave the European Union.

The rise in Portuguese yields pushed the gap over top-rated German Bunds back above 300 bps to its widest in almost three weeks.

"The risk around a DBRS downgrade is real but the probability is DBRS keeps Portugal's rating as it is with a negative outlook," said Societe Generale analyst Ciaran O'Hagan.

Portugal's BBB (low) rating for Portugal has a 'stable' outlook and is next due for review by DBRS on Oct. 21.

The rating is also significant because an investment grade rating is required for Portuguese government bonds to be used as collateral by banks at ECB lending operations.

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According to Rabobank, Portuguese banks currently borrow almost 25 billion euros from the ECB, with Portuguese government bonds (PGBs) probably constituting a large proportion of the collateral used.

"This means that if PGBs were no longer eligible it would be a problem for Portuguese banks," Rabobank said in a note.

The sharp rise in Portuguese yields contrasted with the rest of the euro zone, where yields were flat to a touch lower.

There was some focus on Spain ahead of a meeting that could pave the way for the formation of a new government and end eight months of political deadlock.

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