The yield spread of 10-year government bonds in Portugal over German Bunds has increased by about 70bp since this time last month, in stark contrast to a small decrease in the yield spread of 10-year government bonds in Spain. Although the current Portuguese/German spread remains much larger than its historical average, we are sceptical it will contract significantly any time soon. After all, Portugal remains under constant threat of having its official funding pulled owing to its resistance to austerity, and we still believe that the country will ultimately need a second full bail-out.
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