The year isn’t over yet, but we have an early, sleeper suggestion for Chart Of The Year.
It’s the yield on the Italian 10-year bond.
After today’s close, the yield is down to 4.75%, levels not seen since last summer. More importantly, it’s down from a level above 7% exactly one year ago.
We wrote last night that by virtue of random chance, Thanksgivings have tended to mark important milestones in Europe, and last year’s was particularly dark, with yields for everyone shooting up.
But thanks to Mario Draghi, the ECB did two huge things which have changed everything in the Eurozone. First he did the 3-year LTROS (providing the banks a big funding back stop) and more recently announcing OMT (a scheme whereby the ECB can buy bonds of countries to depress their yields, provided that they request it).
In a world where both the Fed and the Bank of Japan are doing QE, the ECB’s actions have always been unfairly lumped in as “bond buying,” but OMT is a much bigger deal, since it actually establishes the ECB as a bank whose role it is to backstop governments (albeit awkwardly). But that’s the start of a huge step towards redressing one of the biggest structural flaws of the Europe, which is that all of the countries must, in a sense, borrow in a foreign currency — a currency which they can not create.
Europe has a ton of work to do, but it took a gigantic step this year, and the market has rewarded it.
By the way, there’s a reason we’re using an Italy chart and not, say, Spain. Spain is a basket case, and its borrowing problems have always been “justified.” There was never a great reason for the markets to freak out about Italy, and the facts that they did spoke to a fear that the whole thing would go bust. Italy’s yield improvement is a big sign of people thinking the project will survive.
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