Bond Traders are Plac­ing Euro-Breakup Bets, Again

The Economic Times - - Money -

Lon­don: Hid­den un­der the sur­face of Euro­pean bond mar­kets, traders are plac­ing bets that will pay out if the risks in the euro zone se­verely es­ca­late. Mar­kets across the con­ti­nent have started to price in the in­creased po­ten­tial for anti-euro can­di­dates to win elec­tions in France and Italy. Re­cent po­si­tion­ing in Ger­man and Ital­ian bonds are hedges against a blow-up in the risk of a breakup in thecom­mon­cur­rency,said­trader­sin Lon­do­nandNewYork,whoasked­not to be iden­ti­fied be­cause they are not au­tho­rised to speak pub­licly.

Six-month Ger­man se­cu­ri­ties have ral­lied more than bench­mark tenors this month and open in­ter­est in twoyear note fu­tures has surged, sug­gest­ing in­vestors are build­ing up long po­si­tions in as­sets that are the clos­est to cash in terms of safety. The yield spread be­tween Ital­ian lowand high-coupon bonds has widened as traders bet against the lat­ter, which would fall much more if the coun­try’s cred­it­wor­thi­ness is called into ques­tion.

The front end of the Ger­man yield curve has out­per­formed over the past three weeks, with 6-month and two-year yields drop­ping 10-14 ba­sis points, while open in­ter­est in two-year fu­tures has jumped by more than 100,000 con­tracts.

In the event of a euro-zone breakup, the safest thing to hold would be cash, and th­ese are the as­sets clos­est to cash.

Moves in the rel­a­tive value of Ital­ian bonds also show signs of hedg­ing.

Bonds with higher coupons trade above par, and th­ese higher priced bonds stand to lose much more in the event in­vestors worry about a pos­si­ble hair­cut in the event of a de­fault.

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.