If you're not convinced that the picture for Italy is all sweetness and light, you could try this one ......
If you're not convinced that the picture for Italy is all
sweetness and light, you could try this one ......
ref :- TRADING POST , by Jamie Chisholm in the Financial Times.
Markets and Investing
The TRADING POST column is usually worth a look, even if
some of the trades highlighted within it can occasionally be a little esoteric
for generalists like us. It's interesting to see how banks and dealers might
actually go about instigating a trade once they've reached a conclusion about
the likely direction of the market, rather than just continuing the theoretical
discussions ...... which is of course pretty much what we do. We are often
given both target and stop-loss levels, and a brief insight into the thinking that
encouraged the trader to enter the position in the first place. These can be
either fundamental or technical in nature ...... which in effect means you can
either make decisions according to what you think the facts are telling you, or
according to what you believe historical price action is saying about what will
happen in the fututre.
Today the focus is on a recommendation from Nomura in
Italian Government Bonds, a.k.a. BTPs. Nomura believe that the fall in
yields and tightening of credit spreads against German Government bonds for
example has gone too far, and there's money to be made from a rise in those
yields.
Now, and for newcomers we are happy to keep repeating it, remember
that bond PRICES and bond YIELDS move in opposite directions. It is of course
crucial to keep this in mind when looking at examples of this type as bond
traders must operate off yields, not prices.
*** There is an absolute logic to this : the same borrower may
issue a number of bonds over time which have the same maturity date. They will
carry the same yield, but because they are likely to have different
coupon/interest rates attached -- which will reflect market rates
at the time of issue -- each one is likely to trade at a different
price.
Anyway, it means that when Nomura talk about
"shorting" (or selling) the February 2033 BTP, they are looking for
prices to fall and yields to rise but it's the yield level they are working on.
They have entered the trade at a yield of 2.39 %, or 239 basis points,
targeting a rise in the yield to 280 basis points at which point they could buy
back the bond considerably cheaper. Should things not go according to plan and
BTPs continue their rise in prices / fall in yields, their stop-loss level
where they would close the trade is at a yield of 228 bp.
As it happens, the yield on 15yr Italian Government debt is
trading at 246 bp this morning ..... which is a nice start and it's being
neither cynical or critical to suggest that they may not have gone public with
the trade had it been heading in the wrong direction. We wish them the best of
luck with it of course, but are probably more interested in what prompted them
to put the trade on in the first place. It seems that there were three reasons
behind their strategy :
1. European Central Bank president Mario Draghi can strive all he
wants to maintain a doveish posture with regard to ECB policy, but Nomura
believe that despite his comments up to now the ECB will begin to taper its
bond-purchasing (QE) programme this year. This will hurt BTP prices in
particular, as of the €1.4 trn of government debt bought by the ECB since March
2015, fully 19% of them have been BTPs.
2. According to Nomura, Italy's growth is close to peak
-- which, it must be said, is a somewhat pessimistic view of things
considering that it's only just started. On top of that, low global volatility
and the consequent fall in risk premiums (see narrowing credit spreads) is not
likely to last. When such things are reappraised, focus will return to Italy's
poor debt fundamentals.
3. At a time of falling global inflation expectations driving
global yields lower, BTP's have further benefitted from the belief that Italian
political risk has receded significantly. It's true that Italy will almost
certainly avoid being forced into an election later this year and can plan for
one roughly on schedule in the first half of 2018, but Nomura are firmly
of the belief that political risk is currently underpriced. And what of the
Italian banks ? The cost of insuring bank credit may have dropped, but the
relatively poor performance of bank stocks suggest that the issues within the
banking sector are still very much a factor ..... and the fact that political
concerns are temporarily on hold does nothing to alleviate those problems.
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