Italian Bonds Resume Plunge, Yields Hit Highest Since 2014

Earlier today, we laid out the three main reasons why, according to Goldman, the Italian bond turmoil was set to get worse: in brief, these were rising government debt (as a result of the sharply higher projected budget deficit of 2.4% through 2021), fading ECB support (QE ending at the end of 2018), and diminished market liquidity (wider bid-ask spreads and declining volumes).

Well after today’s initial selloff, when eurosceptic Claudio Borghi and president of the Lower House’s budget committee commented that the country would have solved its fiscal problems if it had its own currency while Deputy PM Luigi Di Maio said he’s not concerned about spread widening, it did not take long for the market to digest Goldman’s warning and to resume the selling in Italian government bonds, with the 10Y plunging for the second time today, and pushing the yield to 3.448%, the highest since 2014…

… while “lo spread” between Italian and German 10Y paper has blown out beyond 300 bps, the widest going back to 2013.

Curiously, unlike during today’s first selloff, the late day liquidation has not been accompanied by a drop in the Euro, which however may be explained by the sharp drop in the dollar index which has slumped back to session lows.

For now, the Italian bond turmoil remains relegated within its borders, but the question on every trader’s mind is “for how much longer”.