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How the trade worked

The temptation of St David

The buoni postali fruittiferi a termine, nicknamed golden bonds, offered a simple proposition. They were zero-coupon bonds that were puttable at any time. But if you kept the bonds for eight years you would get double your investment back. If kept it for 12 years the investment tripled.

The bonds in question were issued on a tap basis from November 1 1995, and still gave the same yield over 12 years of 9.58%. When they were first first issued, 10-year Italian government bonds were yielding about 12%.

Last year, the government's prudent approach to the budget, which aimed to bring the deficit down to around 3% of GDP in 1997, combined with its slashing of the inflation rate to under 3%, had the market speculating that prime minister Romano Prodi's dream of entering the first round of European monetary union might not be so ridiculous.

The yields on 10-year Italian debt moved accordingly, trending closer to German government levels. Convergence trades had yields on 10-year Italian government paper falling from 9.75% at the beginning of September to 7.80% on November 1, a tremendous rally.

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