Italian yields are once again nudging the 5% barrier, making markets nervous. The country is definitely set to ask for European Central Bank support in the form of Outright Monetary Transactions, say some. It has an impossible funding task, say others.
It’s true that we haven’t seen Italian 10 year yields get near 5% since, er, late February. In the wake of the inconclusive Italian general election result, yields shot up, albeit not as quickly as they have done since the Federal Reserve outlined how it might taper QE last week.
Three months is a long time in the markets but there was not this much chatter about Italy being unable to fund itself then as there is now despite the fact that there is still no firm commitment in place to unwind QE. Instead, all we have is an outline of how it might be slowed and even then only in the US.
The end of QE was never likely to be a painless experience and was always going to cause some short term volatility. But it’s far too early to say that this recent turbulence is any more than that.
Let’s not forget how we got here. Some of the support for the eurozone periphery was driven by an injection of liquidity from the central banks, but also from the announcement of the OMT — and that support still stands.
Commentators were quick to jump on Italy’s auction of two year zero coupon bonds on Tuesday, where yields more than doubled from a month before and reached levels last seen in September.
More than doubled? Yes, but from a euro-era low. Last seen in September? Yes, but that auction was on September 26, well after the ECB revealed the technicalities of OMT on September 6.
That September yield was 2.532%, compared with 2.403% on Tuesday — which isn’t even half of the 2012 peak of 4.86% on July 26, coincidentally (or not) the day that ECB president Mario Draghi said he would do “whatever it takes” to save the eurozone.
In other words, while Italian yields have spiked as a result of the loss of one form of support — US central bank liquidity — they are still well below the levels recorded before the ECB stepped up.
The 2012 peak was not even a eurozone crisis high — two year yields reached 7.814% in November 2011.
Italy is also in a much healthier funding position than this time last year. It has frontloaded its funding when the going was good, bringing down its average cost of funding and lengthening its average maturity.
Any sustained increase in yields and Italy could find itself in trouble, there is no doubt about that. But talk of a bail-out, when levels are still low compared to the past two years and Italy is in a comfortable funding position, is at best ill-informed and at worst reckless.