Italian Bond Yields Cross 7% Pain Threshold (ITLY, ITLT, FXE, EWZ, VGK)

November 9, 2011 12:42pm NYSE:ITLT NYSE:ITLY

Scott Martin: Everything on the Italian yield curve is trading above 7% this morning, revealing traders’ anxiety about the future of the world’s third-biggest credit market, while clearinghouses try to block the exits.


The yield on 10-year Italian bonds surged from 6.75% to nearly 7.5% — decisively pushing up into levels traditionally considered unsustainable for a nation trying to manage its debt.

Most ominously, traders seem to be dumping all Italian paper, from two-year notes on up to the longest-term bonds Rome can issue.

In terms of implied default risk, the pain point seems clustered at the three- to seven-year time frame, with those bonds now offering investors 7.4% to 7.6% in exchange for the risk that Italy will default on its obligations within that period

Compare to Brazil (NYSEARCA: EWZ), where the highest consumer interest rates in the world are matched to extreme investor demand for bonds, leaving yields down in the 3.3% range.

This is not a Greece-level crisis. Greek bonds have largely been orphaned by all but extreme distressed-asset specialists and now offer effective yields of 127% even at the short end of the curve.

But with large European (NYSEARCA: VGK) clearinghouses like LCH. Clearnet and Compensazione e Garanzia jacking up the amount of collateral they want institutional traders to use when buying Italian debt — effectively making it more likely that one or more entities will have to dump in order to make a margin call — the situation is serious.

Not a good day to be holding the Italian debt fund (NYSEARCA: ITLY), much less its leveraged cousin (NYSEARCA: ITLT), except on a short basis.

Written By Scott Martin From Emerging Money

Emerging Money provides insightful and timely   information about the increasingly important world of Emerging Market   investments. CNBC Emerging Markets Contributor Tim Seymour leads the   team of Emerging Money to bring you cutting edge global news and  analysis.


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