Today’s bond market – Italian BTP yield approaching 4%. 3 strategies to seize this anomaly

Italian Bond Yields on the Rise

Far from the psychological threshold of 3.5% and steadily above 3.8% since yesterday, the yield on Italian 10-year bonds even touched 4% this morning.
This has negated all unreliable forecasts of a decrease (and consequent increase in BTP prices) that had been circulating in recent weeks.

ECB Further Away from Real Decrease

Unavoidably, all of this uncertainty is reflected in the ECB’s hesitancy to reduce the cost of money for the same reason: concerns about oil prices and wage trends in the Eurozone.
The WTI’s climb above $80 this morning raises fears of inflation overheating, nullifying expectations of not one but two rate cuts that had been predicted for June 6th and July.

What to Do?

Financial markets are understandably considering all aspects, including the financial stability of the Eurozone in light of election results that could weaken Brussels’ political resilience.
Italy is under close scrutiny, although there are no signs of anomalies in our country, given that even the yield on German 10-year bonds has risen in the past few hours, surpassing 2.6%, not far from last October’s highs.

Admittedly, all bond investment strategies hypothesized until a few months ago are losing strength.
So, what now? There are only three paths to take.

1) Reinvest Coupon Payments

The goal is clear: lower the purchase prices of bonds in the portfolio to benefit when the ECB is truly forced to intervene on rates.
Trying to maintain the overall duration unchanged, given the unpredictability of future developments.

2) Seize Opportunities in Yield Curves

Market nervousness leads to a yield landscape that particularly weakens maturities between 3 and 5 years.
It is more attractive, however, to invest in bonds with around 4% coupons trading around 100.
For instance, there is a lot of activity on the 4% 2037 bond (IT0003934657), trading at par with a net yield of 3.5%.
There is also interest in the 4.15% 2039 BTP (IT0005582421), priced at 99.3 EUR, with a net yield of around 3.7%.

3) Small Bets on Extra Long-Term Bonds

For those willing to take on more risk, increasing positions in ultra-long-term bonds, trading well below 100, is an option.
The timeless 2072 BTP (IT0005441883) is most suitable for this purpose, considering further future small purchases, as it may be above last year’s lows but still offers accumulation prospects over the next two to three years.

Author: Hermes A.I.

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