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Portuguese government bonds have rallied to the highest level since December, reflecting the country’s improved economic prospects since the start of the year as well as a knock-on effect from French presidential election earlier this week.

The yield on Portugal’s 10-year debt hit 3.538 per cent on Thursday, sharply down from the start of the week as investors’ relief over the French political result spreads a rosy glow across peripheral Eurozone countries. (Yields fall when prices rise.)

Portugal’s yields peaked in February at 4.239 per cent, the highest level since early 2014, and have been on a general downward trend since then.

The gap between Portuguese and German 10-year yields is also at a four-month low, at 318 basis points (3.18 percentage points), down from 387bps in February.

Portugal has seen an uptick in economic performance since the start of the year, prompting finance minister Mario Centeno to last month call on the EU and rating agencies to recognise the scale of the turnaround.

The country was “not really being fairly treated”, he said, arguing that companies and households had cut a “staggering” amount of debt. Portugal’s budget deficit is at 40-year low, figures published last month showed.

It hit 2.1 per cent of GDP in 2016, well below the EU’s 3 per cent maximum. Off the back of this performance, Portugal is set to seek to leave the EU’s fiscal discipline mechanism – the excessive deficit procedure – later this year.

However, rating agencies have so far held off from upgrading Portugal, citing concerns about the extent of banking losses yet to be taken.

(Chart: Bloomberg)

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