A strong auction performance for Italy this morning demonstrates banks' willingness to use cheap financing and low capital requirements to jump in on a quick carry trade and have eligible collateral for their
liquidity requirements.
NYT: The Italian Treasury allotted all of the €8.5 billion of the 12-month bills it had targeted for sale, with its yields falling by half or more.
The 1-year Italian bill rate came off sharply. The current yield is 2.7% after peaking back in October at around 8.5%.
![](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiNiyEacn-v6vqkhmauOwtmnUDqx_pUop40iQwjHpqv0k_qjzpPZLypWFwyBQU6XjEtxEkJGeOtt9XMYIkS7mUGh-e56-gRmCNgpoTHRqp4MqYPZ5WpgN0mtKIn4hfW0ekOR0G0YKtnhQY/s1600/Italy1-year+bill+rate.png) |
Italy 1-year bill rate (Bloomberg) |
In spite of this impressive performance, a great deal of risk is still priced into the longer-term paper. The yield curve has gone from "
inverted" to "extremely steep" as the probability of default shifts further out in time. The chart below compares the current Italian yield curve with the one from a month ago.
![](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiA3pKcag_pTdEXJKF5f3dFeqTcUWJEhl3TrjchJ0PNDFODa9iUJ7Tf4ID6HZBXKZL9zERqdhu7as1v_J29_-m_eO2jtjOkNmIU2dN2KnD6QFWHZnD8BgvAH_sIkW1iYhEFPJTuqrStxHc/s1600/move+in+Italy+curve.png) |
Italian sovereign yield curve, now and a month ago (Bloomberg) |
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