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When it comes to investments in Italian government bonds, the recent volume figures clearly speak for themselves: options on Euro BTP Futures nearly tripled with an average daily volume of 20,449 contracts for the month of October compared to the 2018 average of 6,435 contracts per day. The Open Interest peaked at levels beyond 200,000 contracts. What are the facts behind the figures?
Market observers see this development closely linked to the newly formed Italian government and its budget proposal to the EU. The EU rejected it to date because the proposed budget entails an increase of the fiscal deficit to 2.4 percent of forecast GDP.
Rating agencies have recently responded to these developments with the threat of downgrading Italy. Shortly after the budget rejection by the EU, the Bund-to-BTP spread fluctuated around 300 basis points. S&P subsequently lowered its credit rating outlook on Italy from negative to stable on Friday, 26 October 2018, and affirmed the debt grade at “BBB”. Moody’s, on the other hand, set the credit rating at “Baa3” with a stable outlook. The EU demands a new budget version within three weeks, and so far the Italian government has been reluctant to respond to this. This may put more pressure on BTPs and government bond spreads.
Lee Bartholomew, Eurex Head of Fixed Income Product Research & Development, comments: “By construction, BTP futures allow for the trading across a range of underlying government bonds. By streamlining liquidity with our BTP futures and options, investors have maintained the ability to access liquidity, hedge positions and express their trading views in these challenging markets.”
The developments in Italy and its effect on the BTP debt markets are definitely worth watching in the upcoming months.
Eurex offers the full suite of Exchange Traded Derivatives (ETD), both in futures and options, to hedge exposures in the Italian bond market. Furthermore, the instruments present an opportunity to trade the basis on Italian debt instruments, thus complementing the Italian cash market.
