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EURJPY TECHS

Bearish Cycle Still In Play

EGB FLOWS
EGB FLOWS: ###POV. WHAT HAPPENS IF PORTUGAL IS UPGRADED TO IG BY FITCH?
- On Friday, Fitch could update its rating for Portugal and many investors hope
for an upgrade to IG and inclusion in some bond indices should unlock a new
customer base for PGBS. Where will these bonds come from? What might happen to
spreads?
- Portuguese bonds are unique amongst the major issuers in that over the past
year MFI's (banks) have bought E3.6bln of them.
- In the 12 month period to October banks in Europe have sold E34bln of German
debt, E46bln French, E33bln Italian, E11bln Spanish, E15bln Dutch, E13bln
Belgian, E5bln Austrian, E1bln Finnish and E1.4bln of Irish debt. Naturally,
PSPP is responsible for these sales.
- Approaching year end, when banks' balance sheets get cleaned, the presence of
E3.6bln of extra PGBs is something that needs attention and these may slow down
the expected positive reaction to any upgrade. Room for outperformance is slim:
- 10Y Bund-PGB is already trading at a fairly tight 10bp. Below 5 years, the
Portuguese curve sits atop of the Spanish curve and often through Italy.