Italian Bonds a bargain at 7%?
As the markets open this morning with things looking lower we cannot seem to get away from the headline news. Italian Bonds cleared the 7% hurdle now so they look to be on a path toward unsustainable interest payments in the future. I think most investors in the debt world are worried about what they are going to get for what they own now. You think the Super Committee is taking note of this as we plunge inexorably toward the same sovereign debt structure as the PIIGS? Great, we can be just like them. The market did seem to signal this so let’s take a look at the AlphaVision™ Landscape for the close on November 8th, 2011.
Originally I was looking for positions to sell options in. When I open up the AlphaVision™ for Bloomberg Landscape I saw something I don’t normally see. Color in this case is 30 Day Implied Volatility less 60 Day Historical Volatility. All the red you see below are stocks that have December volatility trailing the underlying activity of the last 60 Days. As you can see most of the active option classes are red and I cannot sell too many options into that. But I think this is telling us is that options are pricing forward movement lower than the past two months. 7% yields in Italy or not, the market is pricing lower implied volatilities.
The close up below is of the SMH (Semiconductor HOLDERS ETF) and EUO (ProShares UltraShort Euro ETF) ETF’s. Note how the market is pricing almost the entire ETF complex for a slowdown (read red) in Implied Volatility. The top two that bucked the trend (Dark Green) are the SMH (which I discount because of wide markets) and the EUO for higher volatility looking forward.
The higher EUO volatility differential rightly thinks the Euro mess is still rolling but I think we start to see less effect on US Equities than over the last two months as the real exposures to this mess unfold.
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