From the October 01, 2011 issue of Futures Magazine • Subscribe!

New bonds on the block: Prometheus revisited

It’s been more than a decade since the London International Financial Futures Exchange (now NYSE.Liffe) quietly laid its Buono del Tesoro Poliennale (BTP) Italian Treasury bond futures contract to rest after the euro made it obsolete. Two years ago, Eurex dug it up and pieced it together to create a successful "new" product.

"From 1997 to 2007, anyone could hedge their Eurozone sovereign exposure with the bund, bobl and shatz," says Ludvino Silva, a former debt manager for the Portuguese government. "You had a premium charged to non-German debt, but that was mostly based on liquidity and other issues — not to default risk."

That began to unravel in 2007 with the advent of the credit crisis that sparked today’s sovereign debt crisis. Eurex responded by bringing the BTP back to life — first with futures on the 10-year component in September 2009, then with a 2-3 year component one year later and finally with a five-year component in September 2011. The new BTP futures contract closed out August with open interest of 37,000. Volume averaged nearly 490,000 per day after two months that saw the 10-year BTP futures plunge more than 10 handles in July — from just above 108 to just below 98. It then soared back up to over 106 in August, mostly on the strength of one five-handle day. By September, it was spiraling downward again.

It adds up to more than €10,000 per contract on the first drop and €8,000 on the rebound, with more apparently to follow — and the ride, at times, has been even wilder for those spreading the BTP against the German bund. On Labor Day alone, the yield on the 10-year bund fell 15 basis points, to a record low of 1.85%, while BTP yields rose 28 basis points, to 5.54%.

You could have made money by spreading bunds against BTPs on Eurex, or you could have gone long futures on the Germany-Italy sovereign yield spread. The CME Group launched this family of 12 bond pairs in May, and dubbed them "Sovy Futures" (See "" on last page).

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