Alert: Italian Bonds: 2-Year Note Yields Rise Above 10-Year Rates, 5-Year Debt Climbs Above 7.5 Percent!

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Italian Bond Yields Reach Point Of No Return (Telegraph, Oct. 20, 2011):

Italian bond yields back at 6 percent are a deeply ominous sign that the eurozone’s third largest economy is reaching the point of no return, where markets essentially become too expensive for funding.

This is what happens when the ECB stops buying Italian bonds…

Italy 5-Year Yield Tops 7.5% on LCH Charge as Berlusconi Quits (Bloomberg, Nov. 9, 2011):

Italian bonds slumped, driving two- five-, 10- and 30-year yields to euro-era records, after LCH Clearnet SA raised the deposit it demands for trading the nation’s securities.

Two-year note yields rose above 10-year rates, with five- year debt climbing above 7.5 percent as Prime Minister Silvio Berlusconi’s offer to resign left his weakened government struggling to implement austerity measures to reduce borrowing costs. German 10-year bunds outperformed all their regional peers as the drop in Italian bonds boosted demand for the safest fixed-income assets. The euro sank and U.S. Treasuries jumped.

The LCH change for Italy “is a big deal in that it highlights the deterioration of its credit quality,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “The more pressing issue still remains the political backdrop. The market would love a technocrat government to get the reforms through. If we go down the election route we’ve probably got three months of inaction.”

The yield on Italy’s five-year notes jumped 82 basis points, or 0.82 percentage point, to 7.70 percent at 11:56 a.m. London time. The 4.75 percent securities due in September 2016 dropped 2.995, or 29.95 euros per 1,000-euro ($1,363) face amount, to 88.81.

Germany’s 10-year bund yield dropped six basis points to 1.74 percent, with the two-year note yield one basis point lower at 0.39 percent. The extra yield investors demand to hold 10- year Italian debt instead of bunds reached 5.75 percentage points, also a euro-lifetime high.

Euro-Region Bailouts

The increase in rates risks making it too expensive for Italy to borrow in the market. Ireland began talks to receive aid on Nov. 18 last year, three weeks after its 10-year yield breached 7 percent. Portugal asked for help on April 6, three months after its borrowing costs jumped past that level. Greek yields also breached 7 percent before winning aid in April 2010.

The European Commission sought “concrete answers” on how Italy will cut its budget deficit as surging Italian bond yields triggered a global market slide. European Union Economic and Monetary Commissioner Olli Rehn “was worried yesterday and continues to be worried today,” commission spokesman Amadeu Altafaj told reporters in Brussels today.

The so-called deposit factor for Italian bonds due in seven-to-10 years will be raised to 11.65 percent, LCH Clearnet said in a document on its website dated yesterday. That compares with a charge of 6.65 percent announced on Oct. 7. Additional costs on all securities maturing through 30 years and including inflation-linked bonds will be applied from today’s close, LCH said.

‘More Expensive’

“It becomes more expensive to fund a position in Italian bonds with higher clearing margins,” said Norbert Aul, a European interest-rate strategist at RBC Capital Markets in London. “This is in particular important for banks. Who is affected and to what extent is difficult to assess.” The revisions are weighing on Italian government bond prices, he said.

The two-year note yield climbed 90 basis points to 7.28 percent. The European Central Bank was said by four people with knowledge of the transactions to have bought Italian securities today. An ECB spokesman in Frankfurt declined to comment.

Credit-default swaps protecting Italy’s government bonds rose 12 basis points to a record 536, according to CMA prices, with the euro weakening 1.4 percent to $1.3642. The yield on the 10-year U.S. Treasury note fell 10 basis points to 1.98 percent. The Stoxx Europe 600 Index slid 2.1 percent.

Bond Auctions

Berlusconi said last night he’d step down as soon as parliament passed cost-cutting steps pledged to EU allies. He favors early elections, he said today, and Angelino Alfano, head of his People of Liberty party, might be the candidate. The government is yet to finish writing the austerity legislation, Mario Baldassarri, head of the Senate Finance Committee, said today.

Germany sold 1.5 billion euros of inflation-linked bonds maturing in April 2018 at an average yield of minus 0.4 percent. The auction drew bids for 1.8 billion euros of the securities, less than the maximum target of 2 billion euros, according to a Bundesbank statement.

Finland auctioned 1.5 billion euros of April 2017 and April 2021 securities.

The yield spread between German and French 10-year bonds jumped 15 basis points to 144 basis points, the most since before the start of the European common currency.

German bunds have handed investors a profit of 8.6 percent this year, matching U.S. Treasuries, which have also returned 8.6 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds lost 8.9 percent.

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