Warning sounded on Italian bonds
Source: Bloomberg News |
July 12, 2011, Tuesday
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Print Edition
Print Edition
ITALIAN bond yields are less than 2 percentage points away from disaster as the price of its 10-year notes tumbles, according to Gary Jenkins, head of fixed-income at Evolution Securities Ltd.
Yields on Italy's benchmark 10-year bonds closed above 5 percent for the first time since November 2008 on July 6 and were at 5.55 percent, a nine-year high, in London yesterday. Greece, Ireland and Portugal all had to ask for international assistance after their 10-year yields rose past 7 percent.
Italy is being dragged into the crisis because it has more than 1.6 trillion euros (US$2.6 trillion) of bonds outstanding, the world's third-largest pile of debt after the US and Japan. Lawmakers are seeking to balance the budget by 2014 and plan to push 40 billion euros of deficit-cutting measures though parliament later this year.
"It is worth remembering how quickly bond yields can get out of control by looking at what happened to Greek, Irish and Portuguese 10-year yields," said Jenkins, who predicted Greece's bailout last year and who was formerly the head of fundamental credit strategy at Deutsche Bank AG and global credit-research chief at Barclays Capital. "What would keep me awake at night if I was a European finance minister is that we are only about 2 percent away from a potential disaster scenario."
Italian 10-year yields still have "some way to go" before they reach 7 percent, Jenkins acknowledged.
European finance ministers were meeting late yesterday amid concern Italy will be engulfed by the crisis and divisions between member states on how to structure aid for Greece.
The cost of insuring Italian government debt using credit-default swaps jumped to a record, helping also send the Markit iTraxx SovX Western Europe Index to an all-time high.
Contracts on Italy surged 32 basis points to 283, according to CMA prices. The Markit iTraxx SovX WE climbed 33 basis points to a record 289. An increase signals deteriorating perceptions of credit quality.
"The markets are focusing on Italy and Spain and combined they are too big to save," said David Owen, an economist at Jefferies International Ltd. in London. "Note that they are all linked together by their banking systems - the French banks are all over Spain and Italy."
While Italy's debt is equivalent to about 119 percent of its US$2.1 trillion gross domestic product, its budget deficit is only 4.6 percent of output, compared with 7 percent in France and 9.2 percent in Spain. The annual growth rate was 1 percent in the first quarter, the lowest of all the major European economies except Spain.
Yields on Italy's benchmark 10-year bonds closed above 5 percent for the first time since November 2008 on July 6 and were at 5.55 percent, a nine-year high, in London yesterday. Greece, Ireland and Portugal all had to ask for international assistance after their 10-year yields rose past 7 percent.
Italy is being dragged into the crisis because it has more than 1.6 trillion euros (US$2.6 trillion) of bonds outstanding, the world's third-largest pile of debt after the US and Japan. Lawmakers are seeking to balance the budget by 2014 and plan to push 40 billion euros of deficit-cutting measures though parliament later this year.
"It is worth remembering how quickly bond yields can get out of control by looking at what happened to Greek, Irish and Portuguese 10-year yields," said Jenkins, who predicted Greece's bailout last year and who was formerly the head of fundamental credit strategy at Deutsche Bank AG and global credit-research chief at Barclays Capital. "What would keep me awake at night if I was a European finance minister is that we are only about 2 percent away from a potential disaster scenario."
Italian 10-year yields still have "some way to go" before they reach 7 percent, Jenkins acknowledged.
European finance ministers were meeting late yesterday amid concern Italy will be engulfed by the crisis and divisions between member states on how to structure aid for Greece.
The cost of insuring Italian government debt using credit-default swaps jumped to a record, helping also send the Markit iTraxx SovX Western Europe Index to an all-time high.
Contracts on Italy surged 32 basis points to 283, according to CMA prices. The Markit iTraxx SovX WE climbed 33 basis points to a record 289. An increase signals deteriorating perceptions of credit quality.
"The markets are focusing on Italy and Spain and combined they are too big to save," said David Owen, an economist at Jefferies International Ltd. in London. "Note that they are all linked together by their banking systems - the French banks are all over Spain and Italy."
While Italy's debt is equivalent to about 119 percent of its US$2.1 trillion gross domestic product, its budget deficit is only 4.6 percent of output, compared with 7 percent in France and 9.2 percent in Spain. The annual growth rate was 1 percent in the first quarter, the lowest of all the major European economies except Spain.
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