Yield curve anomaly provides free leverage for hedged speculation in the yield curve front end
Growing concerns of an imminent economic slowdown has triggered investors to look for safer alternatives. Portugal has shown strength by recovering since the crisis in 2012, with persistent growth and a declining unemployment. Amongst the love clouds, we find several warning signs that might affect their 10-year government bond yield. At the same time, we see a malformed front end of the Portuguese yield curve, which although shows stable growth and a healthy political environment, are susceptible to contagion risk from Spain, which is enough for a correction of this anomaly to give opportunity for great profits with low risk. We suggest taking a short position in the Portuguese one-year bonds and a long position in the Portuguese six-month bonds to limit the downside risk.
Analysts: Nils Billgert (MSc in Economics) and Tom Ghorbani (MSc in Economics)
