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Bonds: Italy on the brink

Date: Friday 25 Nov 2011

Bonds: Italy on the brink

Bond traders were weighing two strands of the European debt crisis on Friday as Italian interest rates remained over the “death point” of 7%.

If ever there was a hospital pass in international politics, finding yourself Prime Minister of Italy as it hurtles towards bankruptcy must surely be it. Mario Monti’s new government raised €8bn from lenders today but only on very short term (6 month) debt and at an interest rate virtually double what the country was paying just last month. The six month notes went at 6.504%, up from 3.535% in October.

Italy also sold two billion euros of “zero coupon” bonds, at a rate of 7.814% - these bonds do not pay an annual return - or coupon - but the borrower repays more than the initial loan on redemption, in this case 7.814% more.

Italy simply cannot afford to be borrowing money at above 7% for a sustained period of time. The trouble is, the market believes Italy - and its banking system - is a huge risk and so is only lending money at punitive rates. The benchmark 10 year bond rose 15 basis points or 0.15 percentage points during the day to 7.26% by 4.37pm.

The other major story driving sentiment is a rumour from Reuters that the private sector, e.g. banks, may not have to contribute to a Eurozone bailout by accepting losses on their bond holdings. This would be a bold step by euro area governments and has seen equity prices across the EU rise. The exact details of the plan, however, are as yet unknown.

French bonds appeared to beneft from the news, with the yield on 10 year notes falling 2 basis points to 3.7%. Spain however was not so lucky, its 10 year debt yield climbed 7 basis points to 6.7%.

A country that hasn’t figured as heavily in the debt drama of Europe is Belgium but as readers of this column will know, it’s debt yield has headed north in a frghtening fashion this week. As of 4.46pm it stood at 5.86%, up 13 basis points. Since the beginning of November Begian debt has climbed around 120 basis points. The problem is that the country's French speaking and Dutch speaking politicians appear unable to agree a budget for 2012, making markets sceptical it can implement the budget cuts necessary for survival.

Elsewhere, and at 4.52pm German 10 year bunds were up 7 basis points at 2.26%, UK equivalents were up 13 basis points at 2.29% and US 10 year treasuries were yiedling 1.95%, a climb of 7 basis points.

BS

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