La prima de riesgo italiana —medida como el diferencial entre el bono italiano a 10 años y el alemán, considerado un activo refugio para los inversores ofrecida a los inversores— se ha situado este viernes por encima de los 200 puntos básicos por primera vez desde junio de 2017 ante la incertidumbre política en el país.

El interés del bono italiano a diez años subía este viernes al 2,463% desde el 2,4% del cierre de ayer, su mayor rentabilidad desde el pasado 24 de marzo, ampliando el diferencial respecto al bund hasta los 201,4 puntos básicos desde los 194,4 puntos básicos del jueves, su mayor brecha desde el 8 de junio de 2017.

De este modo, en lo que va de año la rentabilidad exigida a la deuda italiana ha pasado desde el 1,998% al final de 2017 hasta el 2,463% actual.

En el caso de España, el interés del bono español a diez años se situaba en el 1,437%, frente al 1,394% de ayer, con un diferencial respecto al bono alemán equivalente de casi 100 puntos básicos, su mayor separación desde enero de 2018.

La situación política italiana está aumentando el riesgo país como demuestra la escalada de la prima de riesgo. Tradicionalmente la prima de riesgo italiana y española se han movido en terrenos parecidos, con una estrecho margen entre una y otra. Pero la compleja situación política en Italia y la incertidumbre sobre su futuro Gobierno, que ha mostrado señales antieuropeistas, ha disparado el indicador que mide el riesgo país.</s>LONDON, May 25 (Reuters) - The gap between Italian and German 10-year government bond yields stretched to its widest level since June 2017 as uncertainty over an incoming government continued to weigh on the debt outlook in the euro zone’s third largest economy.

Italian Prime Minister-designate Giuseppe Conte this week began putting together his cabinet team, with party leaders pushing for an 81-year eurosceptic economist to be given the pivotal post of economy minister.

The prospect of an anti-establishment Italian government has pushed the Italy/Germany 10-year government bond yield spread about 60 basis points wider since last Wednesday, May 16.

On Friday, the spread widened further to 196.8 basis points, the highest since June 2017. (Reporting by Abhinav Ramnarayan; Editing by Saikat Chatterjee)</s>When it comes to the latest rout in Italian bonds, which has continued this morning sending the 10Y BTP yield beyond 2.40%, a level above which Morgan Stanley had predicted fresh BTP selling would emerge as a break would leave many bondholders, including domestic lenders with non-carry-adjusted losses...

... there has been just one question: when does the Italian turmoil spread to the rest of Europe?

One answer was presented yesterday by Goldman Sachs which explicitly defined the "worst-case" contagion threshold level, and said to keep a close eye on the BTP-Bund spread and specifically whether it moves beyond 200 bps.

Should spreads convincingly move above 200bp, systemic spill-overs into EMU assets and beyond would likely increase. Italian sovereign risk has stayed for the most part local so far. Indeed, the 10-year German Bund has failed to break below 50bp, and Spanish bonds have increased a meager 10bp from their lows. This is consistent with our long-standing expectation that Italy would not become a systemic event. That said, should BTP 10-year spreads head above 200bp, the spill-over effects onto other EMU sovereigns would likely intensify.

Well, as of this morning, the 200bps Bund-BTP level has been officially breached. So, if Goldman is right, it may be time to start panicking.

Ironically, almost as if on cue, just as the Italy-Germany spread was blowing out, a flashing red Bloomberg headline hit, confirming the market’s worst fears:

This confirmed reports overnight that Spain's biggest opposition party, the PSOE or Socialist Party, was pushing for a no-confidence motion again Spain's unpopular prime minister. The no-confidence call follows the National Court ruling on Thursday that former Popular Party officials had operated an illegal slush fund, as a result of which nearly 30 people were sentenced to a total of 351 years in prison.

And while Spain's anti-establishment party Podemos has already called for a Raoy no-confidence vote, the Socialist Party joining that call makes this outcome more likely, but would still need the support of one more party as just these two do not guarantee Rajoy's exit, and a Rajoy overthrow depends on the participation of market-friendly party Ciudadanos, Spain's 4th largest party.

Well, following this headline, Rajoy's political future suddenly appears to be over as Ciudadaons, which holds the balance of power in Spain's government, just gave the PM a thumbs down.
• CIUDADANOS WILLING TO BACK NO-CONFIDENCE VOTE AGAINST RAJOY

Immediately after the news, the selling started with Spain's 10Y bonds erasing day's gains, with the yield now higher by 4bps on the day, while Spain's Ibex slumped, falling as much as 0.9%.

Which means that, while independent of the Italian bond rout, Europe's political crisis may very soon have not one epicenter, but two: Rome and Madrid.</s>LONDON (Reuters) - Italy’s bond yield spread over its German equivalent stretched to its widest for nearly a year on Friday and the spread over Spain hit crisis-era levels on fears over the spending policies and eurosceptic outlook of the incoming Italian government.

The closely watched Italy-Germany 10-year spread, seen by many investors as a proxy for sentiment towards the euro zone, widened to 200 basis points (bps) for the first time since June. IT10YT=RR DE10YT=RR.

Italian Prime Minister-designate Giuseppe Conte this week began putting together his cabinet team, with party leaders pushing for eurosceptic economist Paolo Savona to be given the pivotal post of economy minister.

Meanwhile, the equivalent Italy-Spain 10-year spread, also watched by some investors as a measure of political risk in the bloc, hit 100 bps for the first time since January 2012. IT10YT=RR ES10YT=RR

It surged to 106 bps, before tightening again after an 8-bps in Spanish 10-year government bond yields on news that Spanish Prime Minister Mariano Rajoy could face a no-confidence motion.

This Italy-Spain spread is watched because of the similarity in size and credit rating between the two southern European countries, so any significant difference in borrowing costs is considered a sign of a market under pressure.

Increasing concerns over a potential new Italian government comprising of anti-establishment parties 5-Star Movement and the League is primarily responsible for pushing these spreads wider in recent weeks.

Weakness in euro zone growth, as indicated by a recent disappointing set of PMI data, is also hurting the peripheral European bond market, analysts said.

“There’s still a lot of uncertainty over Italy’s fiscal policy. The thought of Savona as economy minister could be a factor but the main reason is the worries over this spending policy,” DZ Bank analyst Sebastian Fellechner said.

DZ Bank analysts believe the Italy-Germany 10-year bond yield spread, which was as low as 112 bps last month, might go as wide as 250 bps if a new Italian government goes on a spending spree as promised.

“I expect a second major (widening) movement when the government will begin its work,” Fellechner said.

Meanwhile, Germany’s 10-year government bond yield dipped further to hit new 4-1/2 month lows of 0.44 percent, after the collapse of a summit between the United States and North Korea sparked a bid for safe haven assets.

U.S. President Donald Trump on Thursday called off a summit with North Korean leader Kim Jong Un set for next month, citing Pyongyang’s “open hostility”, and warned that the U.S. military was ready in the event of any reckless acts by North Korea.</s>* Italy/Spain yield gap hits 100 bps for first time in six years (Writes through)

LONDON, May 25 (Reuters) - The gap between Italian and German 10-year government bond yields pushed out to 200 basis points on Friday for the first time in nearly a year as fears over the spending policies and eurosceptic outlook of the incoming government hit sentiment.

The closely watched spread between two of the euro zone’s largest countries, seen by many investors as a proxy for sentiment towards the euro zone, has widened by more than 30 bps this week .

Italian Prime Minister-designate Giuseppe Conte this week began putting together his cabinet team, with party leaders pushing for 81-year eurosceptic economist Paolo Savona to be given the pivotal post of economy minister.

Meanwhile the equivalent Italy/Spain 10-year spread, also watched by some investors as a measure of political risk in the bloc, hit 100 bps for the first time since January 2012.

This spread is watched because of the similarity in size and credit rating between the two Southern European countries, so any significant difference in borrowing costs is considered a sign of a market under pressure.

Increasing concerns over a potential new Italian government comprising of anti-establishment parties 5-Star Movement and the League is primarily responsible for pushing these spreads wider in recent weeks.

Weakness in euro zone growth, as indicated by a recent disappointing set of PMI data, is also hurting the Southern European bond market, analysts said.

“There’s still a lot of uncertainty over Italy’s fiscal policy. The thought of Savona as economy minister could be a factor but the main reason is the worries over this spending policy,” said DZ Bank analysts Sebastian Fellechner.

DZ Bank analysts believe the Italy/Germany 10-year bond yield spread, which was as low as 112 bps last month, could go as wide as 250 bps if a new Italian government goes on a spending spree as promised.

“I expect a second major (widening) movement when the government will begin its work,” Fellechner said.

Meanwhile, Germany’s 10-year government bond yield dipped further to hit fresh 4-1/2 month lows of 0.45 percent, after a collapse of a summit between the United States and North Korea sparked a bid for safe haven assets.

U.S. President Donald Trump on Thursday called off a historic summit with North Korean leader Kim Jong Un scheduled for next month, citing Pyongyang’s “open hostility,” and warned that the U.S. military was ready in the event of any reckless acts by North Korea. (Reporting by Abhinav Ramnarayan; Editing by Hugh Lawson)</s>According to a widely reprinted and circulated report in the Wall Street Journal, for the first time since 2000, U.S. government bonds now yield more than all of their developed world counterparts. Looking just at the 10-year security, the yield on the benchmark Treasury note now yields more compared to a record number of countries, and the yield differential between the U.S. government note and its German bund counterpart is its widest in almost 30 years.

Basically, this means that the arguably safest investment available anywhere in the world – the one American business schools still hold up as a “riskless” benchmark – yields way more than most other sovereign debt, including Italy’s, Canada’s and Australia’s – but no, not Greece’s, although they’re not too far off.

Let’s look at the numbers.

As of May 22, the 10-year U.S. Treasury note was yielding 3.06%. Since breaking through the 3.0% barrier on May 14, the yield has remained mostly above that level ever since, hitting a high of 3.12% on May 17. That’s the first time the yield has stayed above the 3.0% level more than a day or so since 2011. While the yield has since come back down recently to below 3.0%, I think it’s more likely to hit 3.10% again before it moves much below 3.0%.

So how does that stack up to other developed country sovereign bond yields?

Using May 22 closing levels, the German bund – the benchmark for the eurozone – yields just 0.56%, or 250 basis points below the U.S. note. The Japanese 10-year bond yields just 0.05%. Elsewhere, 10-year U.K. gilts yield 1.52% -- half of what Uncle Sam pays – and Swiss bonds yield just 0.10%. Greece is at 4.39%, although that’s down sharply from recent years.

Even yields on Italian sovereign bonds, which have recently soared as an anti-establishment coalition seeks to form a government and return Italy to its financially-profligate ways, are way lower than their U.S. counterparts. The 10-year Italian government bond was recently trading at more than 2.40%, its highest level in four years. And yet it still yields a good 60 bps below what full faith and credit U.S. bonds yield.

Well, yes and yes.

Interest rates and bond yields, as we know, are a product of not only credit risk but also supply and demand and the cost of money. The U.S. passes the credit risk test with flying colors – not because our government is so fiscally responsible (it surely isn’t) but because it has the power to tax its citizens and businesses as much as it can get away with or, when that fails or isn’t enough, print and borrow more money. Few nations on earth can get away with that without creating hyperinflation.

Which leads to the second factor, supply and demand, and that’s where we see the reason for high U.S. borrowing rates.

 Uncle Sam is in debt by more than $21 trillion, far and away the most of any nation on earth. Indeed, America’s external debt is larger than the next three countries’ total combined: the U.K. at $8.5 trillion, France at $5.7 trillion, and Germany at $5.4 trillion.

In other words, the world is flooded with U.S. government debt. There’s obviously a price to pay to get people to buy it all.

Actually, the U.S. is pretty fiscally responsible compared to its developed world counterparts. That $21 trillion in external debt roughly equals the size of U.S. GDP. That’s a trivial percentage compared to 313% for the U.K., 213% for France, and 141% for Germany. Surprisingly, Italy’s sovereign debt to GDP ratio is only 124%.

Of course, there’s another big factor that puts upward pressure on U.S. yields, and that is monetary policy. While the U.S. has pretty much moved past the financial crisis and the Federal Reserve has at least started the process of raising interest rates and unwinding its massive balance sheet, the rest of the world still acts like their economies are in dire straits.

For example, the European Central Bank’s main interest rates are still at their record lows set two years ago, with the deposit facility at negative 0.40% and its main refinancing rate at zero. The Bank of Japan’s key short-term interest rate remains at a record negative 0.10%. Both central banks have shown no indication when they might start raising rates or unwinding their own giant bond portfolios. The Bank of England raised its short-term rate last November but hasn’t made any similar moves since.

In other words, while the Fed is trying to normalize monetary and interest rate policies, albeit very slowly, the rest of the developed world shows no inclination to follow along. Interest rates are being kept deliberately and artificially low, and may remain that way for who knows how long?

So what’s the takeaway from all this? Despite falling this week, I think U.S. interest rates and government bond yields are likely headed higher, which will make the yield differential with the rest of the world even wider. With practically no credit risk, U.S. government bonds appear to present tremendous value, at least against their global counterparts.

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Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.</s>Just when you thought it was all over... the PIIGS chaos rears its ugly head as political crises start to spread across the periphery.

European stock markets are extremely mixed with the core relatively stable as the periphery plunges...

Italian banks stocks - so bloated with Italian sovereign debt - are accelerating lower...

Italian 2Y Yields are now at their highest since 2014...

As if Italy was not enough, Spain is now under pressure as PM Rajoy is under pressure from a potential 'no confidence' vote and Spanish bond yields (and sovereign risk) is blowing out...

The widest spread to Germany in almost 6 months...

Which means only one thing... the PIIGS are coming back to life and there is little that Draghi can do this time...

And all of this is weighing on the euro...

And finally - the scariest chart of all - reflecting the reality of Italy's 'Mini-BoT' parallel currency concerns...</s>LONDON, May 24 (Reuters) - Debt of Italian state agency Cassa Depositi e Prestiti (CDP) is taking a hammering on a par with that suffered by Italy's government bonds on fears the incoming government will use it as a vehicle to fund a borrowing binge.

The state-owned institution, which operates as a promotional institution, funding state or local authority projects, is similar to -- though smaller than -- Germany's KfW and France's Caisse d'Amortissement de la Dette Sociale (CADES), whose debt is considered a proxy for the sovereign's.

With two anti-establishment parties, 5-Star and League, set to form a coalition and potentially increase public borrowing, Italian bond markets have sold off heavily, with average 10-year yields rising around 65 basis points since early May.

But CDP is also in focus, after it was mentioned prominently in an agreement between the two parties that was leaked to media. Referring to CDP as a "superstar", the document proposed increasing its annual borrowing to 70 billion euros.

If implemented, such plans would take CDP from being a small issuer, borrowing at most a few billion euros a year in international markets, to the realms of giant agencies like KfW and the European Investment Bank, which routinely borrow 60-70 billion euros annually.

Though this proposed borrowing figure did not appear in the final agreement, the coalition did hint at an enhanced role for the state agency via the creation of a public investment bank using "existing structures and resources".

5-Star officials have demanded in the past that CDP play a greater role in helping Italy's economy and also want to replace its current heads when their terms expire this year.

All that has hit CDP's bonds, with the yield on its 2024 issue up nearly 40 basis points over the past week to 1.73 percent.

The yield on its 2026 bond has surged to a record high 2.12 percent, up 38 bps from last Wednesday -- the day after the document was leaked to media. Bond yields rise when their prices fall.

The move contrasts with the relative stability seen in the debt of French agencies such as CADES as French government bonds weakened ahead of the presidential election there last year.

"We will have to wait and see what CDP's role is eventually, but there is a danger that if the new government carries out its plans, it could mean extra spending for CDP," said DZ Bank strategist Christian Lenk.

"We will see way more BTP (Italian government bonds) funding and also extra CDP borrowing if it is used as an additional vehicle."

CDP issued less than 1 billion euros of bonds last year, according to Thomson Reuters data, and currently has only about 14.8 billion euros of international bonds outstanding.

That includes 500 million euros of "social bonds" it sold last year to support small and medium enterprises located in economically deprived areas of Italy or hit by natural disasters.

The sell off in CDP's debt has been more or less in line with Italian government bonds, which investors have dumped due to coalition plans to cut taxes, spend more on welfare and scrap pension reforms. Equities too have fallen heavily, led by banks.

The ripple effect from any changes at CDP could be wide, as the agency holds the Italian state's stakes in companies including Telecom Italia, oil services firm Saipem and broadband company Open Fiber <IPO-EOF.MI>.

Not everyone was unhappy on Thursday about the prospect of more borrowing by CDP.

"If it means additional borrowing for CDP, it makes sense that these bonds are tanking," said one banker, who preferred to remain anonymous as he is not authorised to speak about his clients. "But more borrowing for CDP means more business for us, so bring it on!" (Reporting by Abhinav Ramnarayan, Additional reporting by Steve Scherer Editing by Catherine Evans)</s>Two days ago, when looking at the ongoing turmoil gripping the Italian market, where the imminent formation of a populist, Euroskeptic government with a penchant for spending and threatening to impose a "parallel currency", the "Mini-BoT" has sent Italian yields soaring to the highest level in years, we noted something more troubling not just for Italy, but for all of Europe: Italy's redenomination risk was soaring, and was starting to spread to the other key PIIGS: Portugal and Spain (Greece, having recently concluded its 4th bailout will probably not implode soon).

Still so far the contagion has been quite limited, with "redenomination risk" barely rising to levels seen at the start of the year. Furthermore, today the (long-overdue) hurricane that hit Italy's market over the past two weeks seemed to abate in early trading, pushing BTPs modestly higher and bunds lower, after local press reported that 5-Star was considering Luidi Zingales for Finance Minister, a far more mainstream candidate than the euroskeptic Paolo Savona who is currently the top candidate for the post.

However, the early bund weakness and peripheral gains were quickly reversed after reports that Paolo Savona, who has repeatedly called on the Italy government to plan for a possible euro exit, was in fact backed by League leader Salvini to become economy minister. As a result, Italian 10Ys, i.e. BTPs, which were tighter to bunds by 13bps early on Thursday, moved back to the widest levels of 2018, with the spread blowing out to 193bps...

... while the 10-year yield broke above the closely watched 2.40% resistance level.

But while some modest "contagious" spillover was already noted, much of Europe remained calm despite today's renewed late-day selling in Italy.

So when does it get serious, or in other words, what is the trigger for acute and broad contagion from the ongoing Italian political chaos?

For the answer we go to Goldman, whose X-asset strategist Francesco Garzarelli published a report this morning in which he notes that after an eerie period of complacency, markets "appear to be extremely sensitive" all of a suden to any suggestion that Italy could threaten to leave the Euro area (which would cause systemic turmoil) in order to extract greater concessions from its European partners or, in a worse-case scenario, introduce a dual currency to pursue its domestic policy ambitions.

Confirming what we already know, Garzarelli then notes that concerns about a "parallel currency" exploded after their made their way into a draft of the political agreement leaked by the press on May 16. "This marked a watershed, as the 10-year spread to Germany at that time was still close to 130bp."

It is against this backdrop that the choice of the next Minister of Finance - whether euroskeptic Paolo Savona or someone else - in the coming days will be particularly sensitive. And here Goldman notes that "for the risk premium on Italian sovereign bonds to stabilize, investors will at least need to be reassured that the seat will be occupied by someone who believes that Italy’s prosperity lies unambiguously within the single currency area." In other words, if the 5-Star/League coalition does stick with Savona, all bets are off.

It's at that point that contagion emerges as a credible threat to the rest of the Eurozone, potentially reigniting the sovereign debt crisis as some dramatically recall from those days in September-November 2011.

But at what levels? The answer to that key question brings us to the punchline of Goldman's report, which notes the following in terms of actual prices:

Tactically, we would be neutral on 10-year BTPs with spreads n in the 175-200bp area. If the anti-Euro rhetoric subsides and the Ministry of Finance is offered to an individual with a moderate stance and relevant background, which is our base case, spreads could come back to the 150-160bp range, as levered short positions are closed. Should, instead, the profile of the Cabinet profile and statements by its members continue to send conflicting signals around Italy’s Euro participation, we could see the 10-year BTP-Bund spread reaching 250bp, pushing the yield on 10-year BTPs towards 3%. Probability-weighting these two outcomes, we come out as tactically neutral at this stage.

That's the baseline scenario: what about the worst case? For the answer look at the BTP-Bund spread and specifically whether it moves beyond 200 bps, or just 7 wide of where it is trading now.

The chart below shows the current level of the spread, and how close Goldman's "contagion trigger" is located.

And now that we know "what" the trigger is, here is the answer to "where" contagion would spillover to next:

Goldman then makes two follow up observations: the first is that as risk persists, the BTP-Bund correlation is likely to remain negative:

The daily correlation between BTPs and Bunds has turned negative, reflecting the Italian political uncertainty (Exhibit 3). We would expect this correlation to fall further into negative territory in two opposite scenarios: (i) a further escalation of political tensions and spill-over effects into other EMU spreads (with BTPs selling off and Bunds rallying) or (ii) an easing of political tensions, triggering a market friendly reaction on Italian rates (with BTPs rallying and Bunds selling off). We observed a similar dynamic after the first round of the French Presidential elections, when markets ruled out the possibility of Ms. Le Pen reaching the second round. In that occasion, the correlation between Bunds and OATs fell dramatically into negative territory as spreads tightened. That said, Italian political uncertainty is likely to linger for longer than was the case in France. We expect this to be reflected in more sustained volatility of Italian bond returns, and this is the reason why we expect spreads to trade above their macro ‘fair’ levels.

But the real question is at what point does Italian risk - and contagion - lead to economic weakness (or collapse) and forces the ECB to not only halt its tightening plans and undo its tapering intentions, but forces Draghi to engage in even more QE which, as a result of a continentwide bond shortage, will mean the ECB now has to buy ETFs (and single stocks) outright:

The potential for spread contagion can put further pressure on the Euro outlook. The majority of the EUR slide over the past month reflects other factors, including a softening of the Euro area’s growth momentum, and should be couched in the context of broad Dollar strength. Yet, judging for example by the behaviour of EUR/CHF, Italian risk has played a more central role in setting the tone for the currency, especially since the draft agreement was leaked by the media last week. Going forward, as long as Italian risk remains confined to the country’s borders, our FX team does not see much additional Italy-related downside risk to EUR. However, should this become a more systemic event, then we would expect to see it weigh on the currency, which would be primarily visible in EUR/CHF and secondarily EUR/USD.

This observation gives traders a second (and third) contagion indicator: the level of EURUSD and EURCHF:

Something tells us we will experience the "falling EUR" scenario long before the "push higher" case arrives.</s>Rome, May 24 - The spread between Italy's 10-year BTP bond and the German Bund rose to 195 points after anti-migrant Euroskeptic League leader Matteo Salvini said he intended to do "the opposite of what the EU has threatened Italy with for the past few years". It later dipped to close on 191. The yield went up to 2.4%, a level it last reached at the end of 2014, before dipping to 2.38% by the close. The spread had earlier dipped to 177 on better expectations from the incoming government. There was pressure on Spanish and Portuguese bonds too. The spread has been rising on fears about the eurozone's first populist government coming to Italy, in an alliance between the League and the anti-establishment 5-Star Movement. The lower the spread is, the better it is for the Italian economy and debt-servicing costs. The spread rose above 200 points last year on EU populist fears in France and other countries.
The yield spread between the Italian and German 10-year government bonds rises to over 2% for the first time in a year, due to the political uncertainty.