Carry Trade Gradually Seeping Into Italian Bond Market - Crédit Agricole
20 Nov 2012 00:43 EST
By Peter Chatwell - Senior Interest Rate StrategistCrédit Agricole
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Volumes and news flow were sparse in yesterday’s session, but there were two aspects of yesterday’s trading which we think are noteworthy.
Firstly, that until 3pm London time, the intraday trading of BTP futures and Bund futures was closely correlated, and on a close/close basis Bund, BTP, Bono futures were all down between 10 and 30 cents on the day by 5pm. This is how a ‘normal’ market behaves (i.e. euro bond futures trade in the same direction, rather than against, each other).
Secondly, looking at the performance of each of the major tenors, the only market which made gains in the 2-10Y area yesterday was 2Y BTP. This is a positive development, as we think this is more evidence of the ‘carry trade’ gradually seeping into the BTP market.
We noted last week that the ‘core market carry trade’ tends to be sensitive to outright yield levels and, with 10Y France near its all-time low of 2.05% and the obvious psychological level of 2%, we would speculate that some investors would look at 2Y BTPs to find a yield above 2%. We also note that the 2Y part of the BTP curve is expensive on our yield curve model (found in the above link on p.10), again hinting at some recent demand.
