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%.
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| 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.
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| Italian sovereign yield curve, now and a month ago (Bloomberg) |
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