We believe that Italian CCTs-eu bonds offer value at current price levels. In this short note we want to highlight the strengths and weakness of these bonds, particularly in relation to current market conditions.
Historically CCTs-eu offer a not-negligible pick up vs. nominal BTPs. Recently, the maturity-weighted average pick-up of CCTs with a maturity of more than 1Y is close to c.20bp. In the last decade, this pick-up was strongly correlated with Italian credit risk. However, recently this relation has disappeared, and has even become slightly negative since the pressure on the real rates is linked to restrictive monetary policy decisions.
Looking at the CCTs-eu curve, we note that the pick-up vs. BTP is not homogenous across the curve. CCTs-eu bonds that offer the higher pick-up vs. nominal BTP are those with 2024-2026 maturity and the longest CCTeu Oct 2030, and we note that the current cheapening of the 2024-2026 CCTs-eu is close to the maximum level seen since June (on average above the 80 percentile).
One caveat featured by this type of bonds has historically referred to the different (and lower) liquidity conditions of CCTs-eu vs. nominal BTPs. However, we note that in the recent months the liquidity conditions of CCTs-eu have significantly improved.
Due to different liquidity conditions, we suggest looking at these bonds with a strategic approach. Furthermore, portfolios of real money investors might find these instruments more efficient to hedge their interest-risk exposure since the alternative strategy (to buy a fixed income bond and asset-swapping it) entails higher capital and execution costs (e.g., for hedging the counterparty risk exposure).
The main caveat is related to: i) the possibility of a surge in Italian credit risk, although this is in no way our base-case scenario; ii) if we see a bullish leg up in the market CCTs-eu bonds might lag the tightening in the yield moves for some weeks.