BTP and Spread worse and worse: what now?  The titles to keep an eye on

BTP and Spread worse and worse: what now? The titles to keep an eye on

Below is the interview with Sante Pellegrino, an independent trader, to whom we asked some questions on the current situation of the bond market.

The Spread BTP-Bund remains close to the area of ​​240-250 basis points. What are the expectations in the short term?

In the last period we have seen a surge in the BTP-Bund Spread and this creates many difficulties for the possibility of arbitrage between multiple maturities and multiple listed BTPs.

The BTP-Bund Spread must remain below 260-230 basis points, otherwise it will be a bloodbath for the credit market.

The hope is that the resistance of 240 basis points will play its part, bringing the differential first in the 230 area and then up to the threshold of 200 basis points.

For the moment the luck is that we do not see a strong volatility and this could create the conditions for a reversal in the short term, but in the coming days we will see what will happen after the first meetings and the relative decisions of the Central Banks.

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The yield of the 10-year BTP went even higher, reaching the 4% threshold. Do you expect further hikes?

The yield of the 10-year BTP is starting to give a little more serious problems that do not only concern the financial market.

The more the ten-year rises, the more the shares are affected, because the rise in yield creates a decreasing value of the shares themselves.

In addition to creating problems for equities, the rising yield negatively reflects on the supply of money and therefore means that there is uncertainty about Italy’s solvency.

The ten-year almost 4% is a sign of nervousness and weakness in the financial and credit markets.

The hope is that the 10-year BTP yield will not exceed the June highs of 4.3%, beyond which a very difficult scenario would open.

Given that we are close to these highs, we could see the overbought and a lot will also depend on the maneuvers of the Central Banks.

The surge in the 10-year yield is also due to the words of President Powell at the Jacksone Hole symposium.

In essence, now the 4% threshold could act as a resistance and favor a 10-year decline towards 3.5% before and 3.3% after.

Otherwise a very negative phase will open, but I am confident that the 4% threshold can represent resistance, at least in the very short term.

Which BTPs are you keeping an eye on more than others in this market phase and what are you waiting for now?

The index of listed BTPs is at 80 points and this means that most of the BTPs will be attracted towards 80 euros per contract.

We are in a very delicate phase and as long as the index remains around 80 points there will be no possibility of seeing the listed BTPs rising.

When 88 points are exceeded and 92 points are exceeded, BTPs will begin to gain confidence and therefore to rise.
On the one hand we have overbought the ten-year yield, on the other hand we have oversold the listed BTPs.

As mentioned before, we are in a difficult phase, so much so that we have the BTP 2067 and the BTP 2072 which are highly negative.

We are at 75 euros per contract with 2067 and therefore we are on very important lows that bring back to the beginning of the summer.

From current levels, either a double bottom channel is being built, or we will find ourselves facing a devastating scenario for bonds.

The 76-65 points threshold for the BTP 2067 is very important: if there is accumulation there will be a rebound towards the resistance at 82, / 82.5, where an important game will be played on the upside.

BTP 2072 is also close to very significant lows and it is now important to find a support base.
The eventual rebound from 63 / 63.5 could take place up to 68/70, with subsequent extensions to higher values.

What can you tell us about the recent performance of the Bund and Treasury and what are the possible scenarios now?

What is more worrying is the yield on the Bund which saw an impressive rise in August, going from 0.88% at the beginning of the month to the current value of around 1.58%.

We are heavily overbought, but this does not mean that it will immediately reverse the yield, indeed sometimes in similar situations it happens that we go up further.

The American ten-year is also overbought around the 3.3% area and we must hope that there is active resistance and that we can return to evaluate any positions of recovery of the declines.

The support that could attract the American ten-year is that of 2.9%, below which it will be possible to go down towards the area of ​​2.5% / 2.6%, after which the danger can be declared to have been avoided.

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