Recap 11-09-11

Main Items:

  • Italian 10y yields hit 7.48% and spread over bunds widened to 5.75%, as LCH increased BTP margin requirements. ECB buying was reported to be marginal.


  • China CPI declined to 5.5% as exp vs 6.1% prev. PPI declined to 5.0% vs 5.8% exp and 6.5% prev
  • Japan Eco Watchers Outlook Survey declined to 45.9 vs 46.4 prev


At 7.25%, Italian 10yr yields are deep in junk bond territory. Arguably, they are undervalued relative to the probability weighted spectrum of possibilities. However, the money that capitalizes on these opportunities are in a mountain fort somewhere, along with cans of beans and some guns. In the meantime, issuance continues. Unlike the Greek referendum fiasco, Italian yields can’t be recalled back below 7%. As a result, the only catalysts for a reversal of this move are aggressive ECB action or aggressive austerity measures by the Italian government. Given that the ECB has essentially used rising BTP yields as a stick to beat the Italian government into pursuing austerity, as well as the fact that passage of weak austerity measures are not expected until next week, the catalyst does not appear forthcoming. Finally, we are past the first week of the month, when a stream of important cyclical economic data could possibly bring in some bids.
Conclusion: it’s not quite time to buy the dip yet.