A Simple Reason Nobody's Buying Italian Sovereign Debt

italy

Photo: Wikimedia Commons

The funny thing about Italy is that its debt situation, on paper, is not that dire. Its very close to running a primary surplus. Its debt is generally domestically owned.And yet, there it goes on a Greece-like trajectory, terrifying everyone.

So what gives?

One hedge fund manager explained to us a simple issue that has more to do with market structure than fundamentals.

The traditional owners of sovereign debt have not historically been speculators or people reaching for yield. Up until recently, sovereign debt has mostly been treated as risk free (a position that’s been encouraged by regulators).

But when the price of an Italian BTP gets into the mid-80s, with a yield above 7%.

Conversely, this level doesn’t tempt most speculators, who might really get excited by the opportunity to buy BTPs in the 60s — some level where the risk is really compensated by some juicy returns.

So it’s not that there’s no value, it’s just that there’ s no natural buyer between the speculator and the buyer looking for risk free.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.