Keep Calm, Hold Cash, Watch The ISDA Basis And Buy This Crazy 5X Leveraged Short BTP Product

Who had fun on Tuesday?

Presumably anyone holding the “Boost BTP 10Y 5x Short Daily ETP”, that’s who.

“Well what the actual fuck is that?“, you might fairly ask.

As it turns out, when it comes to soaring Italian bond yields, “there’s an ETP for that” and the vehicle mentioned above is that ETP. It was up some 25% at one point on Tuesday and as you can see, it’s had a nice run of late:

And while in retrospect that might have been a great lottery ticket to have in one’s portfolio, hindsight is always 20/20 and for those who weren’t “smart” enough to get out ahead of the Italian turmoil by piling into a 5X leveraged short BTP product or who weren’t otherwise betting on the situation in Italy to deteriorate meaningfully, Tuesday was probably pretty rough.

For instance, anyone who was exposed on the long side to BTPs ended up having to sell into an illiquid market as everyone tried to de-risk at once. And anyone who was long Italian equities was summarily fucked. If you were long Italian financials, well then all I can do is encourage you not to leap off any bridges.

Here’s a fun chart that, perhaps better than any other, sums up what’s happened over the past week or so:

Amid the recent turmoil, Goldman’s risk appetite indicator has turned suddenly negative, a move the bank attributes to “both government bond and credit signals”:

In the same note, Goldman takes you on a quick tour of what you already know – namely that it’s falling apart for Italy and while we’ve certainly spent a lot of time documenting the malaise on Tuesday, Goldman’s take is worth a quick skim as it puts recent moves in the context of the eurozone debt crisis, a comparison a lot of folks are making right now for obvious reasons.

They note, for instance, that Italian equities’ underperformance versus the broader European equity market and the 1-month blowout in the BTP-Bund spread are on par with the crisis:

And then there’s the vol. premium. Consider this:

FTSE MIB 3-month vol is trading at its highest premium ever to EURO STOXX 50 and has increased by more than 8pp over the last month (Exhibit 3-4). Part of this is due to relatively anchored SX5E implied vol which is still at its 8th percentile relative to the last 10 years. IBEX vol has also lagged the MIB and could catch up given its banks exposure.

What does Goldman think a prudent investor should do? Well, they’re sticking to the plan right now but you’re reminded that “the plan” involves a near-term Overweight in cash, something that is seeming like a better idea literally by the day (or by the hour, depending on if Europe is open or not).

“From here, while we have kept our pro-risk asset allocation we also stay OW cash, in particular in USD terms, as uncertainty is likely to persist in the near term,” the bank concludes.

Or hell, maybe the better idea is to “keep calm and buy a 5X leveraged short BTP product.”