Hedge funds and prop desks were loading up short bond/long Italian credit-default swap positions last week and the convergence pushed CDS spreads on the sovereign to the widest levels in six months. The play is a repeat of a buying spree by the same players last summer which left them facing a liquidity crunch when they came to sell (DW, 6/10). On Thursday the price of protection was 24 basis points, up from 19 bps in November and 21 bps at the start of the month.
Traders said there is once again an excess of buyer demand because more traditional accounts which tend to be sellers of Italian bond protection are standing on the sidelines. "We haven't seen natural sellers of protection coming into the space," said a credit official at a bulge-bracket house in London.
One trader explained the buying spree is connected to uncertainty surrounding the country's election, which was decided Wednesday by an Italian court. He said the fast-money accounts have been trading off the headlines, but traditional managers are holding tight so as not to be caught with long protection positions they are unable to unload.
