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Vontobel bond managers: Portugal rally has room to run

Vontobel bond managers: Portugal rally has room to run

Even if the ECB starts tapering Portuguese bonds still have some momentum in store for a good rally.

This is according to the latest commentary by Vontobel's head of corporate bonds, Mondher Bettaieb, and fixed income portfolio manager Daniel Karnaus.

'It takes two to make a market and we’re comfortable in the belief that any tapering will be offset by demand from private investors,' the duo said.

The pair said - whatever ECB action is - the investor base will further support Portuguese government bonds, especially as it was recently upgraded by major ratings agencies such as Moody’s and S&P.

'This is likely to be followed by Fitch later in the year - on 15 December. These ratings should bring Portugal back to firm investment-grade territory,' they said.

Both managers said Portuguese sovereigns have a high chance to be included in the major investment-grade indices and, as a result, Portuguese government bond (PGB) spreads offer further tightening potential.

They added that PGBs and Italian BTPs have the same rating from S&P, which is why it is interesting to see how the spread between the two will develop.

‘Although Italian BTPs are more liquid than PGBs and should therefore trade tighter versus Bunds, we believe that PGBs versus Italian BTPS offer the best potential for spread tightening.’

Navigating debt traps

Bettaieb and Karnaus said high level of debt is one of the biggest concerns when it comes to Portugal.

In 2016 debt accounted for 130% of GDP, however, the Portuguese treasury and debt management agency forecasts this number to decrease to 109% by 2021.  

'The second big concern has been the level of non-performing loans on banks’ balance sheets which, according to the IGCP, is now said to be “receding and overdue credit is declining sharply”,’ the managers added.

Bettaieb and Karnaus said the overall positive development of the euro area aids the Portuguese economy and by extension Portuguese bonds.

The duo added that there is a strong link between the banking system and the government in Portugal, which can be problematic if the economy is suffering.

With the current strengthening of the public sector debt, however, the banking system is set to stay on an improving path, the pair said. This is especially true as borrowing costs continue to decline and deposit resources are further deployed in the economy.

'With that and with restored property values, the banks will increasingly strengthen their profitability and improve their bad exposure reserving capability, further stabilizing the quality of their assets.'

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