An interesting trade idea from Goldman’s Francesco U. Garzarelli: We recommend positioning for a compression of the yield spread between Italy and France at the 10-yr sector, currently 376bp and not too far from the local highs (404bp), for a target of 250bp and stops on a close above 410bp. The difference between the debt stock (as a percentage of GDP) of France and Italy is at 25-yr lows, and fiscal flows are improving faster in the latter.
The logic here is nice and simple.
The fact of the matter is that if the sovereign debt crisis really re-accelerates, France is likely to get sucked in. If things calm, Italy will improve.