London: Italian two-year bonds plunged the most since the euro came into existence on concern the nation could leave the common currency.
The move coarsed through global financial markets, with investors shunning the securities of Europe’s southern nations and fleeing to the safety of US Treasuries and UK gilts. Europe’s benchmark stocks index, the Stoxx 600, fell into negative territory for the year. In Italy, President Sergio Mattarella has summoned premier-designate Carlo Cottarelli later in the day, with a swearing-in ceremony
Liquidity in euro area bond markets dried up as dealers refused to offer quotes for parts of the Spanish bond market and most of Italy, according to two Londonbased traders who asked not to be identified because they aren’t authorized to speak publicly. The premium to cover a default in Italy’s debt jumped to the highest in nearly five years.
“The Italian house is on fire, and it will spread if someone doesn’t pull out the fire extinguisher soon,” Swedbank AB strategists Par Magnusson a and Filip Andersson wrote in a note to clients. “Italy may become severely injured, but the EMU may die.”
The yield on Italy’s two-year bonds was up 158 basis points to 2.78 per cent, having touched 2.83 per cent, the highest level since 2012. The rate on 10-year notes rose as much as 76 basis points to 3.44 per cent, the highest level in more than four years.
In Spain, where prime minister Mariano Rajoy is facing a noconfidence vote, benchmark yields rose as much as 22 basis points to 1.74 per cent. US 10-year yields fell as much as 13 basis points to 2.80 per cent, the lowest level since April 12, while comparable yields on UK gilts tumbled 22 basis points to 1.10 per cent.
“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,” said Richard Kelly, head of global strategy at Toronto-Dominion Bank in London. “There is no question the kind of moves here are reminiscent of the Euro area debt crisis.”
Italy’s political struggles worsened over the weekend after President Mattarella vetoed the populist Five Star Movement-League’s choice for finance minister, effectively ending their quest to form a government. Markets had already been troubled by the coalition’s spending plans — which were set to cost as much as 100 billion ($115 billion) euros — but now a clash over Europe seems an increasing possibility. On Friday, Moody’s placed Italy’s debt rating under review for a possible downgrade.