Fixed Income Analysis /

Strategy Flash - Rates: Italy’s short end - Our favorite bonds and switches

    21 January 2021
    Published byUniCredit
    • The short end of the Italian curve is likely to remain in line or slightly above OIS rates in the near future. We see any possible widening relative to OIS rates as a good opportunity to increase the position in shorter-dated Italian paper.
    • Against this backdrop, we like BTP 1.35% Apr22 relative to BTP 2.15% Dec21 and we prefer BTP 0.05% Jan23 to both BTP 0.95% 1Mar23 and BTP 0.95% 15Mar23, due to the recent cheapening. BOT-OIS SPREAD TO REMAIN AT CURRENT LEVELS After Italy Alive withdrew its ministers from the Italian government, Italian paper came under slight pressure. At the short end of the curve, BOTs have widened relative to OIS rates. The 6M BOT-OIS spread returned to positive territory (it was slightly negative at the beginning of the year) and is now trading at 2bp, while the differential between 12M BOTs and 1Y OIS rate has widened by roughly 5bp to around 10bp in the past few weeks. As shown in the chart below, despite the recent widening, both the 6M and the 12M BOT-OIS spreads remain close to their historically tightest levels. CHART 1: BOT-OIS SPREADS REMAIN CLOSE TO THEIR LOWS