Portuguese government bonds went on a rollercoaster ride yesterday as the country gears up for national elections in two weeks.
The interest rate on Portugal’s 10-year government bond dropped to a one-month low of 2.46 per cent early in the morning.
But later in the day the rate rose as high as 2.56 per cent.
The volatile day for Portugal’s bonds followed a steep drop in yields at the end of last week when the country was upgraded by ratings agency Standard and Poor’s.
The ratings agency lifted Portugal’s ranking from BB to BB+.
Other bonds of southern European countries followed suit. Italy’s 10-year government bond was yielding over 1.8 per cent by the end of the day, up from 1.76 per cent in the morning. Italian bond yields rose to two per cent from 1.94 per cent.
Portugal faces the prospect of political stalemate undermining its recovery, with neither of its main parties strongly placed to achieve a majority government at parliamentary elections on 4 October.
“[S&P] cited the improving economic picture and increased signs of fiscal consolidation, but there is an election ahead in October so that may be causing some caution for some investors,” said Nick Stamenkovic, bond strategist at RIA Capital Markets.
The upgrade leaves Portugal just below investment grade and it does not trigger automatic buying from ratings-sensitive funds. But it still has an impact on sentiment.
In Spain, investors worry a win for secessionists in a regional election in wealthy Catalonia on Sunday could trigger political instability.