This is the current 10-year. It was issued in February with a 4.75% coupon. It’s now pushing 94, so a year and a half’s worth of interest is thrown out the window. Can you say dog?
This is a seasoned bond. Notice that it lost 6% of its value since July 1. This is death to a global bond fund manager. They have to mark this dreck to market. (The banks don’t; ha ha!)
You might say, “Who cares about the stupid bondholders”. The problems are much deeper than that. Italy is being forced out of the Short Term capital markets as well. Look what has happened to six-month yields. If we are not at the crisis point, we are very close, based on this:
Italian equities have just collapsed of late. Down 23% in the past sixty days. How would you feel if the S&P took a dump like that? Answer: Your confidence would fall and that would bring about a recession. That is exactly what is happening in Italy today. It's happening at lightening speed:
If you are an Italian equity investor (and believe in the buy and hold) then this chart will really hurt. In the past few days we have taken out multi-year lows.
The very rapid pace of this proves one thing. I was not alone in thinking that Italy was an “insider”. A huge amount of money is being forced to rethink what is “safe” and what is not. That this is all happening in the middle of July is not helpful either. The whole country is about to go on holiday.
This last slide shows the pricing for all maturities of Italian debt. Note that there is only one issue trading above par. This is all credit spread deterioration. We are just a week or two before Italy gets locked out of the capital market. I’m not sure than any of the global markets are priced for that event.
Ambrose Evans-Pritchard at the Telegraph wrote about this today. I think he’s got it right.
Once again Europe's debt crisis has metastasized, and once again the financial authorities face systemic contagion unless they take immediate and dramatic action.
“Metastasized” is a horrible word. It’s fitting. I (now) doubt that the "immediate and dramatic" action he suggests is needed is, in fact, going to happen. Gulp!
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"The whole country is about to go on holiday." Bingo! What better time to forment a "crisis" by bidding up some thinly traded Italian bank CDS?
ReplyDeletePamplona isn't the only place they run the bulls. Cui bono?
@ "But What do I Know"
ReplyDeleteTalk all you want about CDS - it is a non-issue. The Italian government bond market is the third deepest in the world and it is capitulating. This is very very bad news.
I had been operating under a similar assumption Bruce (except the optimist in me was expecting Spain to be contained as well). If these levels are maintained (or continute to blow out), does this mean the end of the Euro? I don't think Germany has room for Italy (and Spain's) government debt on it's balance sheet.
Scary stuff.
Since you're in an introspective mood, is there a reliable upper bound on how much damage the French banks could do to the sovereign balance sheet? I love the place to death, but one has to assume many government officals and bank execs are lying through their teeth.
ReplyDeleteYou remind me of foreign investing in the old days before foreign shares were even listed in any country or America’s exchanges. Overnight changes could move 30%. Then came the Russian currency devaluation, again to remind of the same stuff: Bizarre changes! Dramatic charts! Introducing the new Euro was buzz of a new Gibraltar rock. But these charts show, bankers got away with putting lipstick on a pig.
ReplyDelete