What causes the Italian Government debt sell-off ?
After a fairly calm week, the volatility on the European govies became again evident yesterday when bond sales in bordering countries were strong. European peripheral regions' yields have been strongly influenced by the political instability that has been affecting and defining our continent now for three months.
WHAT CAUSED THE SELL-OFF?
Both the poor results of yesterday morning's Spanish bond auctions, which registered a disappointing demand compared to French auctions (known as a non-peripheral country), and recent moves by the Italian Government contributed; We all know how the spread does not tolerate the continuous anti-European statements of Vice Premier Matteo Salvini and the designation of Borghi and Bagnai - well known Euro-sceptics - as chairmen of the Budget Committee of the Chamber of Deputies and Finance of the Senate, and also the different views on pro immigration policy of the German Chancellor and the Minister of the Interior have caused nervousness on the yield curve in the short term (2 y maturities).
LET'S SEE THE BTP AND BONOS YIELDS:
The 10y Spanish and Italian yields have increased by 5 and 12 basis points respectively, while the 2y Italian yield has increased by 22 basis points (reaching 0.75% rate) compared to +4 basis points in the 2y Spanish. This results in a further flattening of the Italian curve, whose slope (10-2) has gone from 198 basis points yesterday to 187 basis points today (-11 basis points).
MAYBE NOT EVERYONE KNOWS THAT…
By excluding country risk for a while, Italian govies are particularly penalized in cases of severe downturns, as they are the only bonds of peripheral countries available to trade futures contracts, which is the only instrument that allows them to "get shorty" on Italian debt. Therefore, if the market intends to sell the European periphery, it will focus on BTPs futures, being considered a sort of benchmark for the entire European peripheral market.
ACCORDING TO YOU, WILL ITALY EVER BE ABLE TO STOP BEING CONSIDERED A PERIPHERAL COUNTRY?