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Italian bond yields rise to worrying levels

1 Nov

Italy falls into unstable territory as its bond yields have risen above six percent for its ten year debt. This is worrying, as the market claims anything above 6.5percent are unsustainable. Michael Krautzberger, head of euro fixed income at Blackrock said, “the fact they have risen since last weeks announcement is not a good sign”.

Market players claim the country is “too big to bail” so let’s consider some of their options.

One option would be for Italy to sell enough bonds at auction which is expected to be in the middle of the month. Some bankers think this is a good solution as it is so soon after the eurozone rescue plan where a new initiative was put into place protecting the first 20 percent of losses when bonds are being sold at auction. The EFSF bonds have an explicit guarantee so ought to be seen by investors as safer. Current prices suggest the reverse.Whilst some are optimistic, others fear Italy’s unstable condition will be unattractive to investors, who may steer clear of Italian bonds at auction.

Another option is for the European Central Bank to buy Italian bonds. The ECB stepped in back in August, purchasing an estimated 70billion euros worth of Italian bonds. Whilst this lowered the percent level, many investors believe the only option Italy has is for the ECB to up their government bond buying programme.

Jacques Cailloux, head of European economics at RBS, said, “All roads lead to the ECB as far as Italy is concerned. The only way to stabilize yields or send them lower is for the ECB to buy Italian debt in size”.

People are now looking to Mario Draghi, the new ECB president, who will decide Italy’s fate concerning the bond market at the central bank press conference on Thursday. He has a tricky decision to make, on the one hand he may have to throw an estimated 700bn euros at the Italian bond market. If Mr Draghi decides against this, it may lead to the percent level rising higher, resulting in the collapse of the euro.