Portugal Downgraded to Junk: Bond Yields Rise Sharply

From the Wall Street Journal:

Portuguese borrowing costs rose sharply Monday as some investors were forced to sell their government bond holdings after Standard and Poor's Corp. downgraded the country to junk status late Friday.

Portugal is now rated as non-investment grade by all three major rating companies. Moody's rates the country at Ba2, Fitch at BB+ and Standard and Poor's at BB.

Non-investment, or junk, bonds have an increased risk of default and pay a higher yield than investment grade bonds to compensate investors for holding the extra risk.

The yield on the two-year and five-year government bonds rose in excess of two percentage points Monday to yield 13.49% and 16.80%, respectively, while the 10-year benchmark rose by just over one and a half percentage points to yield 13.55%, according to data from Tradeweb.

"Now that Portugal is rated as junk by all three agencies, there is forced selling by investors as it [Portugal] is removed from various bond indices and funds," noted one trader familiar with the matter. "It doesn't help that the markets are thin due to the U.S. holiday which makes price movements even more erratic."

Investors are also worried that Portugal may have to follow Greece and re-structure their government debts as they are unable to access the funding market.

The spread between Portugal's government bonds and German bunds hit record levels Monday with the 10-year spread widening by over one and a half percentage points to 1225 basis points.

http://online.wsj.com/article/BT-CO-20120116-705871.html