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Italy’s Bond Surge Comes So Fast Market Is Struggling to Keep Up

Italy’s Bond Surge Comes So Fast Market Is Struggling to Keep Up

(Bloomberg) -- The rush to bet on Italy’s bond market was faster than Eric Oynoyan could publish a recommendation to join it.

The BNP Paribas SA strategist reckoned investors should go for Italian 30-year bonds versus German peers, but a plunge in yields this week -- the biggest in a year -- had already taken them past his suggested entry point. That shows the window may be closing for traders to grab some of the highest returns in the euro area.

Italy’s Bond Surge Comes So Fast Market Is Struggling to Keep Up

“The market is moving so fast,” said Oynoyan, after publishing a note Thursday calling for a bet on the Italy-Germany bond spread at 237 basis points. “When I wrote the piece the spread was at 248 basis points and then I had to wait for editing, and needed to adjust it lower.”

The rally in Italian securities ran out of steam Thursday, after the bonds posted the best performance in the region this week. They are still catching up to a surge among their peers, having lagged behind Greece and Spain in the first half of the year. The turnaround comes as the nation averted punishment from the European Union over its growing budget deficit, while investors ramp up bets on global monetary policy easing.

“People have decided the EU is toothless, so pick up that yield,” said Charles Diebel, head of fixed income at Mediolanum S.p.A., who holds bonds with 10 to 20 years maturity. “It will end in tears mind, but not for now.”

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While many investors have made a fast buck, some have missed out. James Athey, a money manager at Aberdeen Standard Investments, won big last year by betting against Italian bonds, but the rally over the past month saw him stopped out of his short position after ECB President Mario Draghi gave a clear indication that more stimulus may be on the way.

“I made an incorrect assumption regarding the ECB’s willingness to restart QE,” he said, having managed to hedge some of his losses with forward bets on interest rates. “Of course it has been frustrating.”

Italy’s Bond Surge Comes So Fast Market Is Struggling to Keep Up

Italian 10-year yields have fallen nearly 50 basis points this week to 1.63%, having touched the lowest level since 2016. That’s the best performance among global sovereign bonds after the volatile Turkish market. The premium investors pay for Italy over German bunds has slid below 200 basis points for the first time since the government took office last year.

Now that the risk of a budget tussle between the EU and Italy’s leaders has gone for this summer, investors can pick up the high coupon payments offered by investing in Italy’s debt. And beyond the next few months, there is conviction that Christine Lagarde, set to succeed Draghi as European Central Bank president, will increase stimulus either through rate cuts or quantitative easing.

“It wasn’t long ago everyone was in fear because the spread was threatening 400 basis points,” said Gary Kirk, a money manager at TwentyFour Asset Management. “But it’s not overly surprising they’ve rallied given Draghi’s comments and the ECB’s new appointments are seen as maintaining the dovish status quo.”

--With assistance from Tanvir Sandhu.

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee

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