Sharp sell-off in Italian assets just profit-taking - analyst

SHARP SELL-OFF IN ITALIAN ASSETS JUST PROFIT-TAKING - ANALYST


The sharp sell-off in Italian assets is just profit-taking and 10-year yields could go as high as 5.25%, argues Michael Gallagher, at IDEAglobal.
SHOWS: LONDON, ENGLAND, UK (DECEMBER 10, 2012) (REUTERS - ACCESS ALL)
1. IDEAGLOBAL HEAD OF G7 RESEARCH, MICHAEL GALLAGHER, SAYING:

(QUESTION: Italian bonds are getting crushed today. How much higher, do you think, yields will go?)
I think we can see 10-year yields heading towards 5%, potentially even 5.25%. The Italian bond markets had a great run. Yields have fallen from 6.5% in July. We've seen a lot of people move back into Italy at least on a shorter term basis and I think this is a great reason for them to take profits. First of all-
(QUESTION: Is that all, taking profit or are you getting a sense that people are actually thinking about this being a time to go short?)
No. I think at the moment, it's predominantly sort of profit taking. I think you will see some people also jittery about the whole run-up to the elections which are probably going to be in February and what it actually means in terms of the medium-term strategy for Italy.
(QUESTION: So what's the trade here? I mean all the bonds are getting sold off today. But if you take a step back, do you buy 2-year, sell 10-year? Do you buy Italy, sell Spain, for example? I mean what's the trade here?)
I don't think you want to try nuance it sort of too much. The front end of the curve is definitely helped by the existence of the ECB-OMT. Today, however, we've seen the whole curve lift in Italy and I think at least in the short term, the 10-year area is probably the most vulnerable, 2%, 5% and a little bit more, and that's probably the clearest short-term strategy.
(QUESTION: How much of a concern is it that - well, I know you're not an equities analyst per se, but Italian banks are down 7% today. And we also heard today that these very same banks are holding record quantities of Italian government bonds.)
I think the reaction in the banking sector is similar to the B2B reaction. The markets had a great run since the ECB announced the OMT operation. I think you're seeing largely profit taking sort of occurring and that can probably sort of continue for the rest of this week."

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