Volumes in the basis-swap spread market doubled last week as traders entered swaps in response to the Italian treasury's announcement that it "does not rule out buybacks." Traders said the increase in volume was exceptional given that so many investors are on holiday at this time of year.
Traders and investors were entering trades designed to profit if the treasury initiates a buyback program and the bonds increase in value as they become scarcer and outperform the swaps curve. Giuseppe Della Rocca, head of interest-rate swaps trading at IntesaBCI in Milan, said in a typical trade the investor owns the 30-year Italian government bond and enters a swap in which it pays the 6% coupon and receives 10.5 basis points over six-month Euribor. Since traders started entering the position last Monday the spread has narrowed to 8bps over Euribor, he added. Della Rocca thinks the spread could narrow to 6.5bps over Euribor within the next month if conditions in the equity and emerging markets improve. A trader at a major European bank predicts this could go to Euribor flat over the next six months. The typical notional size of the trades is EUR50 million (USD43.65 million) and the maturity is 30 years.
