It’s happened: Tradeweb showed bid yields on 10-year Italian bonds quoted above 7 per cent on Wednesday morning. Reuters wasn’t far behind.
Seven per cent is generally seen as “needs a bailout now”, in the context of previous sovereign bond collapses in the eurozone (eg. Ireland) but clearly, who bails Italy?
The ECB has been seen in the market buying bonds but in small amounts.
In terms of immediate triggers, this is off the back of this morning’s announcement that LCH Clearnet SA was increasing initial margin amounts on the bonds. (And the LCH Clearnet Ltd trigger for bond margin isn’t far behind. [see Update below])
Graphs of doom to below:
Of course, it isn’t much of a technical change from 6.9 per cent to 7 per cent (at 6.9 per cent, future Italian debt issues are already in extreme danger), but in this world of political risk we live in, logic doesn’t tend to be the dominate driving factor. And the speed of the decline would impress the most fleet-footed of collateral-demanding counterparties.
And then there’s how scary the yield curve itself is looking — the recent inversion has become more extreme, with two-year bond yields extending above 10-year yields for the first time in the history of the eurozone:
As if that wasn’t enough, there’s the fact that the CDS is nearing all time highs too:
The all-time closing level high was 538bps on September 22.
CDS referencing Italy were the most active of any single-name contract last week with 580 contracts traded over a notional of $6,952m. The next most active? France, with 365 contracts over $5,787m. This isn’t too strange, since they are the biggest names out there in terms of overall positions anyway, but there is something darkly romantic about it.. since Italy is the country most likely to strip France of its AAA rating.
Update (1035 UK time) — The spread of 10-year Italian bonds to an AAA benchmark used by LCH Clearnet Ltd has now risen above 450bps, the trigger for additional margin. It was 480bps at pixel time.
By Lisa Pollack and Joseph Cotterill