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Bonds: All eyes on Italian yields

Date: Wednesday 09 Nov 2011

Bonds: All eyes on Italian yields

The borrowing rate on Italian 10-year bonds surged passed the critical 7% mark today, the level which economists sees as extremely dangerous and unsustainable.

The spike in yields appears to have been prompted by LCH Clearnet, the London clearing house, which is reportedly demanding more collateral from the close of business tonight from investors trading Italian sovereign debt. “This move forces holders to put up more money or sell, putting pressure on prices and driving yields higher,” notes CMC Markets analyst Colin Cieszynski.

The news comes after the Italian Prime Minister's announcement last night, saying that he intends to resign. Silvio Berlusconi pledged to quit once Parliament has approved the annual budget, including the necessary austerity measures and economic reforms aimed at reviving the country’s economic fortunes.

One commentator called it 'game over' for Italy, predicting the International Monetary Fund would have to bail the country out by the end of the year. However, there are fears that Italy, the third biggest economy in the Eurozone with debts of £1.6tn - or 120% of GDP - simply has too much debt to be rescued.

By 16:18 in London, the yield on an Italian 10-year bond was up 48.5 basis points (bp) at 7.158%, with the risk premium – the spread between Italian and German 10-year bund yields –well above 500bp. Yields reached 7.48% earlier in the day.

The yield on a 10-year Germany bund fell 7.2bp to 1.73%.

The move away from Italian debt spurred demand for other government securities, with the yield on a 10-year US Treasury note falling 10bp to 1.98% and the yield on a UK 10-year gilt falling 9.7bp to 2.17%.

BC

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