In Italy: Meltdown

When it comes to Italy, Tuesday is a “oh, so you thought yesterday was bad?“, type of deal.

If thin liquidity on account of the U.S.. and U.K. holidays was responsible for choppy price action in BTPs on Monday, well then I guess today is just folks who weren’t around yesterday chasing things lower, but whatever the case, things are bad.

Specifically, 2-year yields surged some 150bps and no, that is not a typo. Considering the starting point, this is pretty astounding:


That’s the biggest one-day move on record:


The curve is aggressively bear flattening (again) as traders essentially price in default risk. 2s10s flatter by ~100bps to flattest since 2011.

10Y yields are higher by another 42bps and the BTP-bund spread has blown out to 280bps. Again, the rapidity with which this is unfolding is pretty remarkable:


Clearly, no one is providing any liquidity here. The market is no-bid. As Bloomberg notes, “dealers are start[ing] to pull quotes.” And check this out from Anchalee Worrachate:

Wow, did you see Italian six-month bill auction result today? The bid-to-cover ratio at 1.19 times is the lowest since 2010. The rate surged to 1.213% today compared with the average yield of minus 0.416% in the previous three sales.

This is precisely what former Goldmanite Robin Brooks warned about on Monday evening when he noted that comparing the levels on yields to the debt crisis is probably more an “academic exercise” than anything else, as it’s the speed of the move that counts.

Here’s what Toronto-Dominion Bank’s Richard Kelly told Bloomberg:

Markets are in a ‘sell first and ask questions later’ mode so you can’t really tie this to specifics as much as it is fear of a worst-case scenario.

Right. And remember, the prospect of Five Star and League teaming up ahead of new elections is particularly disconcerting. That is, it’s possible that Mattarella’s decision not to back Savona as FinMin (and thus to play spoiler to Five Star and League’s plans) will make things worse in terms of inflaming populist sentiment and exacerbating intransigence.

Italian equities are of course melting down completely. Italian banks have been halted multiple times for volatility. We’re now down some 25% on the bank index since local highs:


More broadly, Italian stocks are down more than 5% on the week already:


As the above-mentioned Richard Kelly put it, summing up:

There is no question the kind of moves here are reminiscent of the Euro area debt crisis.


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