Citi Wary Of Potential Short-Term PGB Underperformance Vs. Peripheral Peers

Citi note that the “10yr PGB-Bund spread has remained resilient despite Sunday’s election delivering a hung parliament and far-right Chega increasing their seat count 4x.”

• “The centre-right AD coalition looks likely to lead the next government.”
• “Past reforms should ensure continued strong Portuguese economic growth, and the broad political consensus should result in fiscal prudence, keeping us constructive on PGBs vs core/semi-core in the medium-term.”
• “Still, the relatively rich levels increase the risk of near-term underperformance within the periphery. This is especially true vs BTPs, which, despite the sharp recent tightening, don’t look rich vs other risk assets and have found support from robust economic sentiment.”
• “The next 20bp move in 10yr BTP-Bund spread looks more likely to be tightening rather than widening.”