Credit Strategy (Global)

Viktor Hjort

Thematic (Sector/Industry)

In short: The risk that Italy redenominates its debt, ‘Italexit’, is a tail-risk big enough that most investors, regardless of how far their markets are from Rome, must have a view on it, or hold a hedge against it. Our analysis suggests that in spite of the political events over the last few weeks the market is still only pricing in less than a 5% chance of this happening. The CDS market offers the cheapest tail-hedge, and also the most precise.Investment view: Buy Italy Sovereign CDS (2014 ISDA definitions) vs Sell Italy Sovereign CDS (2003 ISDA def), both 5-year, at a spread of 100bp. Turnneutral on: sell BTP vs Bund trade, at 240bp.

In short: The risk that Italy redenominates its debt, ‘Italexit’, is a tail-risk big enough that most investors, regardless of how far their markets are from Rome, must have a view on it, or hold a hedge against it. Our analysis suggests that in spite of the political events over the last few weeks the market is still only pricing in less than a 5% chance of this happening. The CDS market offers the cheapest tail-hedge, and also the most precise.Investment view: Buy Italy Sovereign CDS (2014 ISDA definitions) vs Sell Italy Sovereign CDS (2003 ISDA def), both 5-year, at a spread of 100bp. Turnneutral on: sell BTP vs Bund trade, at 240bp.

Italy - Not Much Italexit Risk Is Priced in Yet.