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Commentary & Analysis
Italian 10-yr benchmark yield at 4.56%; is the bottom in place?
European periphery country bond yields have plunged, after peaking in late November 2011. The catalyst seems two-fold: 1) the success of the European Central Bank’s (ECB) long-term refinancing operations (LTRO), which force-fed money into European banks to better match ongoing liabilities, and 2) the edict by the ECB that it would do all to save the euro and that includes “unlimited” bond buying if necessary.
Italian 10-year yields peaked at around 7.3% back in November 2011 and now sit comfortably at 4.56% today, after hitting a low of 4.4% on December 4th . December 4th was when Italy’s Economy Minister Vittorio Grilli said Italy was on track to hit its deficit targets for 2013 and 2014, Reuters reported. On Sunday, Italy’s central bank Governor, Ignazio Visco, said the country doesn’t need the ECB to handle market tensions now that market access has been restored.
In short, these are quite optimistic statements from Italy’s economics team given the Eurozone recession is still in full swing and likely deepening (S&P warned Italy’s rating could be cut if the recession continues). Plus, there is potential for a leadership crisis to rear its ugly head in Italy now that Mr. Monti has stepped down, and Mr. Berlusconi, in some form or fashion, has stepped up.
A whole lot of money has been made by those gutsy enough (and deep-pocket enough) to have bought Italian bonds early this year and held on tight for a wild ride. The question we always ask: Is everyone that wants to be in this trade already positioned or are there good reasons why it makes sense for more money to flow into Italian bonds?
Technically, there seems a little bit for both sides to support their respective fundamental view (there usually always is):
10-year Benchmark Italian Yield Daily: 1) An A-B-C correction is almost complete; or 2) a classic head and shoulders setup that suggest a test of those old lows at 3.6%?
Traders will likely be focusing on the Dec. 4th, 4.4% low. They rarely make this stuff easy so stay tuned.
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