There’s been a lot of news coming out about Italian bonds lately. Political turmoil and debt are scary and intimidating words to see in headlines. But, how serious is it all? I’d like to share some thoughts on this issue and how the news may affect our bond market.
Although the Italian debt situation is noteworthy, it isn’t a situation that will result in the upheaval of the Euro. Italy has the 3rd largest economy in Europe and the European Central bank will have to “fix” any structural issues that Italy has. The yields moving from 1.7 percent to 3 percent on the Italian 10-year since April reflects there is still an appetite for Italian debt but at a cheaper price. The biggest issue for the Italian debt crisis right now is that there really isn’t a viable government in place to negotiate with. As this is resolved, we should see the overall situation subside a bit as some sort of agreement is reached.
U.S. rates moved inversely to Euro debt as the flight to quality drove the 10-year U.S. Treasury rate down well below the 3 percent level to 2.78 percent. The U.S. 10-year should rebound back above 3 percent as the situation normalizes somewhat in Italy.