Fundamental Analysis

Bond Traders Are Placing Euro-Breakup Bets Again

Bond Traders Are Placing Euro-Breakup Bets Again. 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 the common currency, said traders in London and New York, who asked not to be identified because they are not authorized to speak publicly.

Six-month German securities have rallied more than benchmark tenors this month and open interest in two-year 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 low- and 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.

French Risk Gives a Lift to Safe Haven of German Bonds. Bond Traders Are Placing Euro-Breakup Bets AgainFrench Risk Gives a Lift to Safe Haven of German Bonds. Bond Traders Are Placing Euro-Breakup Bets Again

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.

 

Source – Bloomberg

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Vladimir Ribakov

Following 11+ years of trading experience, trading my own accounts as well as for hedge funds and brokerages, I have decided to fulfill my destiny and to personally mentor Forex and Commodities traders. When I released the “Broker Nightmare” (software that hides trades from brokers) 8 years ago, I found an overwhelming number of frustrated people who genuinely wanted to learn how to trade the Forex market, but instead found themselves scammed and misled. Over the years I have also release other trading systems based on my trading strategies, and met a lot of people on my worldwide Forex seminars. We’ve formed a close Forex community and we meet once or twice a year in various locations in Europe.

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