The two parties that have formed a coalition government in Italy have a program that could well blow up Italian debt, and take the ECB and EU with it. From Wolf Richter at wolfstreet.com:
The ECB’s Negative Interest Rate Policy has been the funniest monetary joke ever.
The distortions in the European bond markets are actually quite hilarious, when you think about them, and it’s hard to keep a straight face.
“Italian assets were pummeled again on mounting concern over the populist coalition’s fiscal plans, with the moves rippling across European debt markets,” Bloomberg wrote this morning, also trying hard to keep a straight face. As Italian bonds took a hit, “bond yields climbed to the highest levels in almost three years, while the premium to cover a default in the nation’s debt was the stiffest since October,” it said. “Investors fret the anti-establishment parties’ proposal to issue short-term credit notes – so-called ‘mini-BOTs’ – will lead to increased borrowing in what is already one of Europe’s most indebted economies.”
This comes on top of a proposal by the new coalition last week that the ECB should forgive and forget €250 billion in Italian bonds that it had foolishly bought.
The proposals by a government for a debt write-off, and the issuance of short-term credit notes as a sort of alternate currency are hallmarks of a looming default and should cause Italian yields to spike into the stratosphere, or at least into the double digits.
And so Italian government bonds fell, and the yield spiked today, adding to the prior four days of spiking. But wait…
Five trading days ago, the Italian two-year yield was still negative -0.12%. In other words, investors were still payingthe Italian government – whose new players are contemplating a form of default – for the privilege of lending it money. And now, the two-year yield has spiked to a positive but still minuscule 0.247% at the moment. By comparison, the US Treasury two-year yield is 2.57% over 10 times higher!
Here is the hilarious chart of the spiking Italian yield from the negative into the positive: