PGB 10s Tighter Vs. Peripheral Peers After FTSE WGBI Inclusion, Wider Vs. Bunds

Late Wednesday saw FTSE Russell announce PGB World Government Bond Index (WGBI) inclusion from November. PGBs will receive a ~0.61% weighting in the index.

• 10-Year PGBs see some tightening vs. peripheral peers, but widen by nearly 1.5bp vs. Bunds as global bond markets come under some pressure in the wake of hawkish central bank speak.
• The lack of tightening vs. Bunds post-WGBI announcement partly reflects the well-documented run of tightening for PGBs, which saw plenty of active investors move into PGB longs/tighteners..
• Index inclusion was widely expected, so fast money won’t be reacting to that, although the news will result in inflows from passive fund managers in the run up to inclusion.
• Domestic political uncertainty presents some near-term questions for PGBs, but most view any related spread widening as an opportunity to re-engage in PGB spread tighteners, given medium-term Portuguese fiscal expectations.
• The move higher in PGB spreads in January was optical, owing to a benchmark roll.

Fig. 1: 10-Year PGB/Bund & PGB/SPGB Spreads (%)

Source: MNI - Market News/Bloomberg