Italian Bonds Encourage Market Madness

The market is trying to forget Berlusconi, with some believing he is going nowhere, and shifted its attention to Italian yields and their Bund spread. Yields are soaring this morning with Italian 10-year product breaking through the psychological +7% level. An important level seen as the watermark where Eurozone countries have tended to walk very quickly into the hands of a bailout. Is another periphery on the verge of losing market access?

Currently for Italy, the bailout pot is not so deep and is insufficient to help the ‘sovereign to the same extent as aid was provided for Ireland, Portugal and Greece’. The EUR and risk trades have fallen like a lead weight this morning. The market has given back the Berlusconi effect and then some as nerves remain raw with large macro account offloading EUR related positions and triggering weak EUR s/l’s. With Italian 10-year product gapping has pushed the market very much onto the back foot heading into the Americas session. As the well dry’s, the market will be expecting a more proactive response from the ECB, especially since the leveraged EFSF is going to find it difficult to “drum up investor enthusiasm to play an effective role”.

Now that confidence is scarce even Italian domestic accounts are jumping ship. With no natural buyers and very little liquidity, is exaggerating the effects of any selling pressure in bonds and risk trades. In a matter of days the market has managed to eliminate two heads of states, moves deemed politically necessary, resulting in little market relief. The madness continues.

The EUR at fresh lows will encourage short positions to move their s/l’s just above 1.37 with the intention that the Americas will continue the Euro trend.

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Demand for US Notes Rally as Italy Trades 7%