How exhausting. At this point, the Euro Crisis has suffered more twists than a poorly written telenovela featuring Ricky Martin, and we’re about to give up tracking it. Eurozone meltdown- once thought to be fantasy fiction from a distant twilight zone- is now a definitive possibility, with German Chancellor Angela Merkel’s party voting to allow a “voluntary” exit from the Euro (hint, hint, nudge, nudge, Greece…) and the ECB basically telling Italy to clean up their own mess.  Of course, just give it another 15 minutes and those headlines probably won’t be accurate anymore…

The whole soap opera has fueled quite a few days of risk on/risk off trading, but the biggest move in these markets has been that of Italian and Spanish bonds (with their yields climbing higher and higher/prices lower).  Italian Euro BTP futures have fallen 16% since hitting a 2011 high back in May.

Seems like just the type of down move a systematic multi-market managed futures program would want to be involved in, doesn’t it? Problem is, we don’t know of any managed futures portfolios boasting that exotic of a bond portfolio.  Spanish bonds used to be traded by some CTAs back in the day, but demand for their bond futures decimated upon switching to the Euro, with only 6 contracts of 10 year Spanish Bond futures traded in the past three months. That’s not doable for even the smallest of CTAs, much less a manager who might need to put on hundreds of contracts.  As for Italian bond futures, it is much of the same story, with low volume and illiquid conditions… though in the past ten days, volume for Italian 10 year futures has jumped 112%…

One other issue, the trend hasn’t been smooth at all, with the spikes down followed by reversions to the moving average, before heading lower once again – as can be seen in the chart below.

So, while you may be sitting there wishing you were short these bonds (yields higher), be careful what you wish for. The liquidity and volume is a non-starter, and even if you were in, you would likely have been stopped out more times than not.  But if the Euro does come apart, one has to wonder if we’ll see a return in volume for the individual country bonds (Italian, Spanish, the French Notiononnel – anyone remember that one?). Wouldn’t bet against it at this point…