Portuguese interests below the Italian? It will not last, states Rabobank

  • ECO News
  • 18 December 2017

Portuguese debt is less risky for investors than the Italian debt. But Rabobank analysts believe this is just a temporary situation.

Portuguese debt is less risky for investors than the Italian debt. This performance has been reinforced with Fitch’s decision do remove Portugal’s rating from the “junk” status this Friday. But this situation will not last for long. Rabobank analysts consider the decrease of the spread between Portugal and Italy is just “temporary”, because the week liquidity of the market will drive investors away.

“With regards to trading this development, we see the knee jerk tightening this morning as representing a ‘good-as-it-gets’ moment. This is owing to the fact that we struggle to see Portuguese Government bonds’ sustainably trading through Italy (while one can certainly make a political case for why it could trade through, liquidity premia are working strongly against you)”, stated analysts from Rabobank in a note quoted by Bloomberg.

“We believe that Portuguese Government bonds’ spread narrowing is done given that Italy represents a natural resting point for Portuguese Government bonds’s spreads and political issues limit any upside for the Italian debt in the near term”, analysts explain, referring to the elections in Italy scheduled for March 4th. “If one were playing a convergence trade then this would be the moment to take profit”, Rabobank adds.

"We see the knee jerk tightening this morning as representing a ‘good-as-it-gets’ moment. This is owing to the fact that we struggle to see Portuguese Government bonds’ sustainably trading through Italy.”

Rabobank

The implied yield for the Portuguese ten-year debt stands below the rate demanded by investors for Italian bonds. And the tendency continues: Portuguese ten-year interests retrieve 5.8 basis points to 1.782%, in comparison to a 2.3% decrease for Italy to 1.789%. Portugal has been experiencing a plunge in debt interests, along with good economic indicators and since Standard&Poor’s removed Portugal from the “junk” status, a decision followed by Fitch, who increased Portugal’s grading by two levels.

PUB