Here's some context for the explosion in Italian bond yields

Stefano Montesi – Corbis/Corbis via Getty Images

  • Italian bonds saw their biggest sell-off in recent history in Tuesday trade, triggered by political uncertainty.
  • There was a surge in demand for safe-haven assets, sending bond yields plunging below key levels that many saw as the start of a new phase for markets.

The complexity and unpredictability of modern politics have caught global markets on the hop yet again.

Italian bond yields have exploded higher, and there has been a surge in demand for safe assets like US, German, and even Australian bonds.

The backdrop is Italy facing fresh elections after President Sergio Mattarella vetoed the proposed appointment of a declared eurosceptic as finance minister in the new coalition of the populist 5-Star movement and the right wing Lega Nord. This effectively scuppered the parliament and the now is that anti-Europe sentiment among Italian voters could harden running into the next election. (Will Martin has a detailed run-down on it all here.)

In Tuesday trade, European stocks fell, with some Italian banks down around 6% for the session while the overall Milan index was down 2.5%.

But the day also saw the biggest move in Italian two-year bond yields in more than 20 years: bigger than any move during the GFC or the European debt crisis.

Here’s the daily chart for this year, showing the breathtaking move. And remember, the European Central Bank is still buying billions of euros worth of Italian BTPs, as they’re known — €3.9 billion worth in April.

For some context on how big this was, here’s Deutsche Bank’s global strategist Jim Reid explaining the scale of the move relative to other huge moves in bonds over the past three decades just on Monday — and it also contains some insights into how the market is measuring the developments in Italian politics.

Picture the scene, you are sitting on a European trading floor and as you get breakfast at your desk, Italian 2 year yields have already rallied 21bps to 0.25% after the weekend news that Italy’s President Mattarella blocked the appointment of Paolo Savona as Finance Minister due to his Eurosceptic credentials…. At that point the market welcomed the appointment of ex-IMF Carlo Cottarelli to run a technocratic administration.

However by late morning fears abounded that this could backfire and make the populists even more popular and with more power when fresh elections are held. So within 2-3 hours we were trading close to 0.96% on the 2 year where they stayed for most of the day before dipping to 0.87% at the close. All in all, a 70.7bps range on the day and +40.7bp wider from Friday’s close.

To put this in perspective we downloaded the available daily G7 + Spain 2 year yields data since 1986 from Bloomberg to see what the biggest daily 2 year moves have been for major economies. Starting with the Italian 2y BTPs, [Monday’s] +40.7bp move was the 13th largest daily move over the past 19 years. Notably, if we exclude the 2011/2012 crisis periods, yesterday’s move was actually the second highest print. Compared to its peers, the change was equally remarkable with Spain having had only 11 days over the past 25 years where its 2yr yields posted larger daily moves than 2 yr BTPs yesterday while the data for the other countries are: Canada 10 days, Gilts 4 days, US and France 1 day, and Germany and Japan zero days. Alternatively, if we assume yesterday’s intra-day move of +70.7bp for BTPs was held into the close, this would be the third equal highest daily change across all of our chosen peers, with the two higher prints being 2 yr BTPs back in November 2011 (+81bp) and 2yr Spanish bonds in July 2012 (+76.4bp). So an extraordinary day and move.

US and UK markets returned from a holiday on Tuesday, and the move gathered pace, sending the benchmark US 10-year bond yield plunging back below the 3% level many saw as a rebasing of the outlook for global assets. It is a momentous and sudden shift, yet again driven by the political surprise.

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