Bond Yields Surge in Italy Yet Complacency Still Abounds

Mike Mish Shedlock

Italy's Bond Yields Widest to Spain in Six Years

The prospect of a spendthrift government taking shape in Italy, the euro zone’s third-biggest economy and its most indebted after Greece, has rattled markets.

Italian two-year bond yields jumped more than 10 basis points to 0.23 percent, their highest since December 2016, before pulling back in afternoon trade to 0.17 percent. A week ago, that yield was at minus 0.11 percent.

The gap between 10-year Italian and Spanish bond yields was at 81 basis points — the widest since 2012, when the euro area was starting to emerge from a debt crisis.

As 10-year Italian debt yields hit 10-month highs at almost 2.30 percent, the gap over benchmark German Bund yields pushed out to 175 bps — the widest since October. [Note: it's now 2.41%]

“If this is the government we’re going to get, the Italian/German bond spread north of 180 bps is certainly a possibility,” said Patrick O’Donnell, investment manager at Aberdeen Asset Management in London.

Complacency Still Abounds

The jump in yields is significant, yet it still smacks of major complacency. The yield on the 10-year US note is 3.07%.

There is a clear risk of Italy leaving the Eurozone, and that is not remotely priced in.

Everyone assumes that because Greece did not leave, Italy won't either. Regardless of what one believes, the odds of Italeave are certainly not zero. A yield of 2.41% does not begin to reflect the risk.

Mike "Mish" Shedlock

Comments (8)
No. 1-8

How can the EU and ECB allow Italy to leave? It would be game over for EU. Let us see what Draghi 'Do whatever it takes TAKE2' looks like. The CBs are not going to go into the sunset without a fight. Interesting times indeed.


QE should never started in EUssr!!!!

Small and medium-sized enterprises are closing in droves, that is of course the bigest problem !

EUssr general direction of competition did not take into account what QE would do to SME companies!

While Big companies get funding at 0.8%~1.2% (even zombie companies), SMEs when they go to the bank they see interest rates of 8~14%

Take for example IT chain stores!
Do you know how much are they earning on a Laptop ?

3 fu….king € euros

Yes, you read it right, they win 3€ selling a laptop, because they have funding to buy and sell all over Europe.

How a SME can compete with big “chain stores”.

Don’t forget, Laptops is just an example.


Watch what happens when they circle the wagons to defend the project. Change will only happen as a consequence of the German ballot box and tptb don't want that change. Where will pressure be placed and what will be the response in Italy and Germany? Who will be on the receiving end of the most propaganda about "we Europeans"?


There's a very eery silence, a remarkable calm. What is it telling us? Does the market believe central banks are omnipotent with there being no need to react to unfolding saga, or, is everything that needs to be known (and all outcomes) already in the open and discounted? Might the big banks/players not want to react as they could lose future Euro business? Something doesn't add up, it's all too muted.


Out of curiosity Google "EU threatens". They'll be threatening Italy just as they have done many other countries - Norway, Poland, UK, USA, Austria, Belgium, Cyprus, Czech Republic, Finland, Greece, Latvia, Romania, Spain, Ukraine, Hungary - all for different things - at one time or another.


The ECB / Eurozone / EU are going to get blackmailed like crazy on this. And here's why: back of the envelope calculation - ECB own ~340bn EUR of avg ~8yr maturity Italian debt. So every 10bps sell off in 10yrs more than wipes out a typical years ECB profit. And yet complacency still reins as BTP yields are still no higher than last years high. The more you see, the more the Brexit decision looks inspired.


To be honest I'm expecting Mattarella to veto the coalition imminently. Otherwise, folks, it's looking like we have front row seats to an exciting movie

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