Explaining Portugal's Disappearing Risk

Tyler Durden's picture

Early Tuesday morning, the Portuguese 10Y bond was trading over 300bps wider than its close last Friday. Contagion from concerns in Greece and what that meant for a nation that while not in as dire a position as Greece economically was well on its way to totally unsustainable debt levels relative to what little and shrinking GDP they can garner. Market access is of course off the cards and there are reasonable chunks of debt maturing that will need to be funded. Since then the PGB has rallied an incredible 300bps, now trading a mere 5bps wider on the week as if nothing had ever happened. We know the ECB was active yesterday and it appears also today but what is also very notable and perhaps explains more of the compression is the huge drop in the basis between CDS and bonds for Portugal. The basis, as we have discussed before, was extremely wide for Portugal (a quite illiquid sovereign bond and CDS market) and we suspect at a spread between bonds and CDS of almost 850bps, it was just too tempting for hedgies not to buy the package en masse. This means they would have bought PGBs (bonds) and bought CDS protection to try and 'lock-in' the spread between the two. That demand for the basis has pushed it 200bps narrower and given the thinness of the PGB market, the marginal demand from basis traders has exaggerated that rally by the 300bps we noted above.

So Portuguese bond risk remains elevated (CDS around 1400bps and and 5Y PGB around 20% yield) but the drop in the last few days is not a risk appetite signal but reflective of an ECB-spurred risk transfer to basis traders who we assume are more confident in Portuguese bond contracts and CDS triggers than Greek bonds for now. It seems they have found another pivotal security to manipulate down to show 'improvement' as Portugal leaves the global bond indices but is mysteriously bid this week.


Portugal 10Y bonds blew over 300bps wider on Monday into Tuesday (above) - clearly well beyond the rest of its peers. There was plenty of ECB chatter early on Tuesday but it appears that basis traders (below) were also tempted back in to ride the ECB coat-tails and real-money exited. The chart below shows the spread between CDS and Bonds (Bond spread > CDS spread means negative basis) has improved by almost 200bps in the last two days as the spread was just too tempting for basis traders.

We just hope that the elite do not change their mind again on whether CDS help or hinder any sense of reality. We discussed this last year - again and again, basis traders are active and optically suggest spread compression in a virtuous circle - perhaps the proximity of a real test of CDS event triggers was enough to tempt them into the huge spread in Portugal.

Charts: Bloomberg

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Jean's picture

Desperate speculation Portugal will get a deal either as a firewall post-greece, or as an example carrot for greece.

agent default's picture

Post Greece the fallout will be terrible and the Eurozone and the EU will begin to unwind.

mattu13048's picture

Met with one Greek trader at Armada Markets client event today. He said the unofficial unemployment is reaching around 60% there. The country is toast. The political system is totally corrupt there. You have to pay everybody to even go to a toilet and take a leak. And it ain't better in Portugal and Spain. EURUSD should be trading at 1.0000 or lower even with the FED diluting the dollar purchasing power. 

Buck Johnson's picture

Your dead on, they are trying to keep the appearance of everything is okay but it's not.  When this stuff unwinds, it will take the US economy with it.

battle axe's picture

The fix is in, it was decided that if Greece goes that is fine. But Portugal can not go because then Spain is screwed, and then Italy is next and that can not happen. The Germans have spoken, now kneel dogs!!!

Global Hunter's picture

Agree, I reckon that is what all that German posturing in regards to controlling Greece's budgets over the weekend, one final big PR stunt from TPTB to try and sweep a Greek default under the rug.  Good luck with that.

Global Hunter's picture

If I read this correctly there was a 3% up and down swing on the Portuguese 10 year over 3 days...where is zee Price Stabilitee guy?

Hedgetard55's picture

Good luck collecting on the CDS.

vote_libertarian_party's picture

Buying the bond and CDS???  Isn't that the nightmare scenario with Greece now?  Everybody thought they had zero exposure and it turns out they don't.

LongSoupLine's picture



What Portugal needs for recovery is more Facebook...why, look at what it's doing for the US!

LongSoupLine's picture

Crap...junked by the MySpace CEO.

AldoHux_IV's picture

And there's talk of PM's being overbought, I seriously think that the market doesn't realize how much easing the ECB is up to-- with all this liquidity one would think gold/silver would be trading 1850/36 easily.

Dead Canary's picture

1850/36? Try 2000/45. Try 2200/60. This beach ball has been held underwater for  w a y  too long.