The current political impasse in Italy following the inconclusive
results of the Parliamentary elections may extend over the coming weeks
before any meaningful resolution takes place, says Deutsche Bank in a
note to clients.
"We remain cognizant of potential event risk from Italian politics," DB adds.
As such, DB advises its clients to hedge against the potential of the unraveling of the Italian situation using the 10Y Spanish yields as a better vehicle than the 10Y Italian yields.
"At 4.75%, Italian yields do not offer significant risk premium on either side. Instead we find Spanish 10Y yields, only about 10bp from their lows since 2011, provide an asymmetric risk reward profile. In the event of a successful resolution of the Italian political gridlock, Spanish yields should have limited room to rally, while a negative event could result in a significant sell-off. Any contagion from Italy is unlikely to affect the front-end of the Spanish curve which should remain anchored by the backstop provided by the OMT," DB clarifies.
http://www.efxnews.com/story/17698/deutsche-bank-advises-clients-hedge-against-potential-event-risk-italian-politics
"We remain cognizant of potential event risk from Italian politics," DB adds.
As such, DB advises its clients to hedge against the potential of the unraveling of the Italian situation using the 10Y Spanish yields as a better vehicle than the 10Y Italian yields.
"At 4.75%, Italian yields do not offer significant risk premium on either side. Instead we find Spanish 10Y yields, only about 10bp from their lows since 2011, provide an asymmetric risk reward profile. In the event of a successful resolution of the Italian political gridlock, Spanish yields should have limited room to rally, while a negative event could result in a significant sell-off. Any contagion from Italy is unlikely to affect the front-end of the Spanish curve which should remain anchored by the backstop provided by the OMT," DB clarifies.
http://www.efxnews.com/story/17698/deutsche-bank-advises-clients-hedge-against-potential-event-risk-italian-politics
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