Some Context: How Bad Is It In Italy? (ITLY, ITLT)

Tim Seymour: We all know at this point that Italy is the third-largest bond market in the world, so the fact that its sovereign yield curve blew out yesterday has truly massive implications. But just how massive?

For one thing, Italy is big enough to find its share of bottom feeders eager to lock in the highest yields in over a decade, without much fear that a default is on the horizon.

This morning’s auction of 5 billion euros in 12-month paper proved that. There were plenty of buyers willing to come in at 6.09% — well below the 7% that debt throughout the yield curve was paying yesterday.

Naturally, that kind of interest rate is going to cause plenty of pain in Rome if it becomes the trend and not an exception as far as future auctions go.

Next Monday’s five-year bond auction will be the key to watch here. If conditions have improved enough to give the market some relief by then, we could have seen the worst of it.

You can see some of that relief in the Italian bond ETF (NYSEARCA: ITLY) and its triple-leveraged cousin (NYSEARCA: ITLT), which has really suffered lately:

The yield on benchmark 10-year Italian bonds has already deflated to around 6.8% this morning.

That is still extremely elevated by normal standards, especially for a country as deep in debt as Italy. Statistically speaking, the country is planning on spending 77 billion euros ($100 billion) just financing its existing debt this year.

And with 200 billion euros of bonds maturing in 2012, it will need to come up with massive amounts of cash to make its principal payments — or else borrow at elevated rates.

Written By Tim Seymour 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.

About Tim Seymour: Tim is a founder of Emerging Money.   He is a founder and Managing Partner at Seygem Asset Management, and   The Emerging Markets Contributor to CNBC. Seygem Asset Management   focuses on investing throughout the global emerging markets asset  class.  With a view that emerging and developing economies will continue  to  outpace the economic growth and advancement of developed economies,  Seymour has devoted a career to investing in  the dominant markets of  tomorrow, today. Seymour’s career has included  significant experience  in both alternative asset management (hedge  funds) and capital markets,  having launched two hedge funds, and built  the largest Russian broker  dealer in the USA. Seymour started his career  at UBS, focusing on  international credit (cash, swaps, forex) in a  specialized hedge fund  group (New York). Seymour completed the firm’s  training program after  graduating with an MBA in international finance  from Fordham  University. Seymour received his undergraduate degree at  Georgetown  University.

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