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