Italian Debt: Now Worth a Look?

By JONATHAN HOENIG

As bond prices swoon, some value investors are seeing opportunity. But beware: Picking the bottom is a dangerous game.

I'm not a bottom fisher, value buyer or knife catcher. Because markets are never wrong, but opinions often are, I hold fast to the philosophy that one must acquiesce to the market -- not argue with it. To that end, I see a security plunging to multi-month lows as something to avoid, not an investment to add to my portfolio.

Still, most investors are intrigued by the notion of a bargain and many are now undoubtedly looking at Europe, whose distressed and debt-riddled PIIGS (the economies of Portugal, Ireland, Italy, Greece and Spain) are continuing an historic slow-motion collapse that has the potential to tear the European Union apart.

I last wrote about Europe's debt crisis in September. Since then, despite a battery of interventions, proclamations, meetings, regulations and bailouts, the financial and social crisis has deteriorated. Street battles with police protesting entitlement cuts have become so common as to rarely make the news anymore. Just yesterday 2000 Greek taxi drivers blocked roads to the country's main airport as part of a 2-day protest.

Bonds of these big spending countries have plunged, pushing interest rates to levels usually reserved for subprime mortgages and delinquent credit card deadbeats. Last week, the yield on Greece's two-year note hit a record 34% -- not exactly a vote of confidence.

Italian debt has also dropped dramatically, with interest rates jumping to the highest levels since the euro's 1999 inception; bond prices move inversely to interest rates. Yields on Italy's 10-year notes are now at 6.03%, the most since 1997 and twice that of neighboring Germany.

According to data from Bespoke Investment, Italy's credit default swap risk has jumped 59% in the past month alone, indicating a growing probability of default.

For those investors brave enough to pick a bottom for Europe's plummeting PIIGS, one option is PowerShares DB Italian Treasury Bond ETN (ITLY: 18.70, -0.25, -1.32%), the only exchange-traded product in the U.S. that gives investors the ability to wager on -- or against -- Italian sovereign debt. 

Tracking an index of bonds with maturities between 8 and 16 years, the notes don't pay interest but match the performance of Italian government bonds, now smack in the middle of Europe's growing contagion.

Bottom fishers play a dangerous game. But if the news out of Europe improves, so will the value of the notes.

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.

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