This spread trade was one of the best setups in 2016. As we have more signals now that ECB will also normalise rates, it is time to review which one can be a better short: German Bund, or Italian BTP?
Fundamentally it is not a question. Italy has a huge and ever increasing debt, absolutely impossible to scale down, especially not until they are EUR zone members. Also if ECB starts normalizing rates, periferia bond spreads will widen again above Bund. This means in the long run BTP short can be more profitable.
Next question is when to weight more on BTP short rather then on Bund, or else when will be time to re-enter short BTP vs long Bund spread again? -> goto Ichimoku and Heikin-Ashi technicals to check
Weekly:
- breakout and blow up of the spread in late 2016 into Italy referendum. Since then we saw BTP consolidation and of course this pull back was helped by the very much behind the curve ECB.
- Trend is clearly up, Ichimoku setup is bullish, with Kijun support around 151 bps (1,51 % spread over Bund) -> technically we still have to focus on short BTP/long Bund position.
- However Heikin-Ashi signals possibly more spread compression down to 151 suport. Red candle and both haDelta and haOscillator point down.
- EWO is ticking lower and MACD crossed below its signal line: more consolidation is possible before next leg up later.
Daily:
- Ichimoku setup is NEUTRAL: everything is located in/at the Kumo cloud.
- EWO and MACD are absolutely neutral too.
- Not much to read from Heikin-Ashi either
This strengthens my view, that maybe we have to wait for clarity, or if we put the trade on, then we have to keep a wider stop and be extremely patient. It can take some more time before the next proper bullish signal comes (bearish BTP vs Bund).
In case the daily trend support breaks, and spread compresses below 150-155 bps, then we could see even more tightenning down to 140 bps based on the weekly picture. When to trade this?
1. Either dips get blocked around 151 and daily gives a proper buy signal
2. Or if it makes a deeper retracement to 140, watch for momentum exhaustion and buy signal there.
My preference is: keep outright short on 5y German BOBL, and try to do this short BTP/long Bund, but maybe with a bit more greedy focus on a setup around the 140+ bps level later.
Fundamentally it is not a question. Italy has a huge and ever increasing debt, absolutely impossible to scale down, especially not until they are EUR zone members. Also if ECB starts normalizing rates, periferia bond spreads will widen again above Bund. This means in the long run BTP short can be more profitable.
Next question is when to weight more on BTP short rather then on Bund, or else when will be time to re-enter short BTP vs long Bund spread again? -> goto Ichimoku and Heikin-Ashi technicals to check
Weekly:
- breakout and blow up of the spread in late 2016 into Italy referendum. Since then we saw BTP consolidation and of course this pull back was helped by the very much behind the curve ECB.
- Trend is clearly up, Ichimoku setup is bullish, with Kijun support around 151 bps (1,51 % spread over Bund) -> technically we still have to focus on short BTP/long Bund position.
- However Heikin-Ashi signals possibly more spread compression down to 151 suport. Red candle and both haDelta and haOscillator point down.
- EWO is ticking lower and MACD crossed below its signal line: more consolidation is possible before next leg up later.
Daily:
- Ichimoku setup is NEUTRAL: everything is located in/at the Kumo cloud.
- EWO and MACD are absolutely neutral too.
- Not much to read from Heikin-Ashi either
This strengthens my view, that maybe we have to wait for clarity, or if we put the trade on, then we have to keep a wider stop and be extremely patient. It can take some more time before the next proper bullish signal comes (bearish BTP vs Bund).
In case the daily trend support breaks, and spread compresses below 150-155 bps, then we could see even more tightenning down to 140 bps based on the weekly picture. When to trade this?
1. Either dips get blocked around 151 and daily gives a proper buy signal
2. Or if it makes a deeper retracement to 140, watch for momentum exhaustion and buy signal there.
My preference is: keep outright short on 5y German BOBL, and try to do this short BTP/long Bund, but maybe with a bit more greedy focus on a setup around the 140+ bps level later.
