Citi: Political Uncertainty A Near-Term PGB Headwind

Citi note that “PGBs face increased political uncertainty following the resignation of PM Costa.”

• “More clarity will emerge at the President’s address to the nation on Thursday, but an early election looks increasingly likely according to local media.”
• “In such an eventuality, the centre-left incumbent PS’ small poll lead of just 4-5pp vs centre-right opposition PSD might be at risk, making it a tight race.”
• “PGBs responded with a 4bp widening vs Bunds/swaps yesterday, but this uncertainty might weigh further in the near-term.”
• “Trade-wise, our longs in 20yr PGBs vs IRISH hit its target last week, leaving us with a short exposure in 5yr vs OLOs and 10yr vs GGBs, which we are happy to hold until more clarity emerges and strong fundamentals reassert themselves.”