An early-warning indicator of yesterday’s market meltdown was Italian sovereign debt, which last week kept falling in price, and rising in yield, even as the Plan to Save the World goosed stock markets temporarily higher.
Italian bonds were trying to tell us something then, and maybe they’re trying to tell us something again today.
Ten-year Italian debt yields crossed 6% yesterday, into the danger zone between 6% and 7%, beyond which it will get really hard for Italy to service its debt.
They’re higher still today,with 10-year Italian bonds yielding 6.3% at last check, and about 45 basis points wider against relatively safe German bunds.
Maybe more troubling, shorter-dated yields are in some cases rising even harder, in effect starting to “flatten” the yield curve, always a sign of trouble ahead.
Peter Tchir of TF Market Advisors writes:
Italian 5 year bond yields hit 6.24% that is 37 bps higher on the day. The spread to bunds moved 56 bps. 10 year Italy “only” yields 6.32% – that is getting scary flat. The front end isn’t as flat, but 2 year Italian yields spiked to 5.5% (55 bps on the day).
If Thursday didn’t teach us that you can’t let price action tell you whether a “grand plan” is good or not, I would watch this very carefully. Yield curve flattening is a big deal and a critical step in the deterioration of the credit worthiness of an entity (the 1st lost from the EFSF may be gaining in value, but who wants the more and more likely 2nd loss?)
Italy swept into the spotlight as the next potential victim of the European debt crisis, with world leaders calling for closer monitoring of Prime Minister Silvio Berlusconi’s deficit-cutting strategy.
Group of 20 leaders are considering International Monetary Fund inspections of Italy, saddled with Europe’s second-largest debt burden, officials said as a G-20 summit in Cannes, France entered a final day. Italy last week bowed to tighter European Union monitoring.
The embattled Berlusconi has yet to convince doubters that the austerity plan announced in August will deliver the savings needed to balance Italy’s budget by 2013, the officials said. Italy’s 10-year bond yields touched euro-era highs yesterday.
“The question is not what’s in the package but implementing it,” French President Nicolas Sarkozy told reporters late yesterday.
Italy has not agreed to any IMF monitoring, an Italian government official, who asked not to be named in line with policy, told reporters in Cannes.
Does this mean that Italian and most likely French Debt will be downgraded by S&P and Moody's, this is so confusing!!
MOODY'S: CURRENT EFSF CAPACITY CAN'T SUPPORT EURO-AREA BOND MARKETS
Moody's Investors Service says the euro zone's bailout fund pulled in only weak demand at a high cost for the bond it sold last week, showing its limited ability to support European government bond markets in its current form.
The yield on Italian 10-year bonds rallied early on Monday afternoon to 6.7pc, while equivalent Spanish bond yields hit 6.03pc, up from 5pc five weeks ago.
It is the first time Spanish bonds have breached the 6pc line since the European Central Bank resumed debt purchases on August 8.
It leaves Spain with borrowing costs closer to those of Italy as the ECB's purchases fail to cap yields, and reveals investors' scepticism as to whether eurozone leaders will be able to push through reforms to end the debt crisis.
Italian bond yields fell from a record high of 7.48pc last week as Silvio Berlusconi made his way for the exit, but jumped again today before Mario Monti, the new technocrat leader, had even named his ministers or laid out a timetable to form a government.
“There’s a high probability of Spain following Italy,” said Phyllis Reed, head of fixed-income research at Kleinwort Benson Bank in London. “In the very short term, the trigger is just the fact that we’re getting close to the edge of the abyss with the euro.”
Problem is the ECB is using the debt crisis to manipulate the mks. MF Global bk monkey wrenched the big game. Banks in Europe and banks connected to Europe through CDS swaps r looking at MF Global outcome. Those banks are Citi which has 24.3 billion and JPMORgan which has 44 billion in CDS in the PIIGS. The other American banks that do business with these banks can xpect mkt volatility. Banks w/a cash hoard will getby, others w/leveraged positons suffer. Stress test are coming back to American banks again. glta