Italy bonds may be attractive amid sell-off

Bond markets are throwing up a fundamental trading question on which fortunes and reputations can be made or lost.

Is the sell-off a counter-move to the long-term trend, or a fundamental shift in attitude to the multiyear bond bull run?

If the latter, next year we may view the recent "spike" in Bund yields as the first step on a long ascent.

As Capital Economics insists, the bounce in rates needs to be seen in perspective. "Yields are still remarkably low by past standards . . . only a little higher than they were at the start of the year in the US, UK, Germany, Spain and Japan, and actually still a little lower in Italy and Portugal."

A very long-term chart shows that the downtrend remains intact. So, assuming we are in the middle of merely a counter-trend wobble, what looks attractive?

The eurozone periphery has been hit hard in the sell-off. Italian 10-year (BTP) yields, for example, were just above 1 per cent in March and rose above 2 per cent intraday during last week's Bund rout.

As Bank of America Merrill Lynch notes, that selling frenzy took volume in BTP futures to a record - excluding action when contracts are rolled over. Such scale of volumes can mark a turning point.

Meanwhile there is more than a year to go before the European Central Bank completes its €60bn-a-month bond-buying programme. Long BTPs are a bet to consider, says BofA.

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