Independent Strategy

Target2 – rising risks to the euro?

It’s another reason to stay short Italian bonds. We also add a short position in Irish bonds. Ireland managed to escape the toxic ‘periphery’ tag through faster growth, but the tsunami of Brexit leaves the Irish miracle vulnerable again. Although only around 15% of total exports from Ireland now go to the UK, for exports from Irish owned firms (i.e. stripping out the effects of the international corporations, which have a high share of imports in their exports and thus a lesser impact on GDP) the total is closer to 35%. Due to Brexit these are already 15% more expensive in sterling terms. Growth risks do not correspond with bond yields of just 60bps over bunds.

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