Italy’s 2-year treasury bonds rose to record levels yesterday, peaking at 2.8% yields having been negative only a week ago. The Euro dropped below $1.16 in response, while the price of gold climbed in step with the yield increases, peaking at £988 per ounce and falling back slightly to £977 – £12 higher than the week before.
Bond demand takes attention away from stocks, and the FTSE MIB in Italy fell by almost 3%, while the IBEX in Spain was down 2.38% and the FTSE 100 in London was down almost 1%.
Italy is a risk nation with regards debt repayment and restructuring, just like Greece and Portugal. Their debt burden is 130% of GDP (Gross Domestic Product). To tackle this, the Italian government needs funds. By selling treasury bonds they can get these funds, and repay these investments in the future. The problem is that with no finalised government, investors aren't reassured they will get reimbursed in a couple of years time.
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President Mattarelli of Italy, who recently appointed Carlo Cottarelli as interim Prime Minister
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With the appointment of Carlo Cottarelli as the interim Prime Minister, investors are even less keen than before to buy these bonds because this government is just temporary, and a future government may change its approach to repayment or decide not to even honour the sale. The counter move is offering cheaper bonds to tempt investors, and this drives the 2-year yield up to the levels we've seen in the past few days.
Economists worry that Italy’s inability to form a government could result in the country failing to repay its debts, despite its attempts to finance repayment through treasury bonds, simply because the ECB and Brussels can't discuss terms and broker a deal until Italy has a formal government in place.
Even if Italy does finally instate a government, both the leading parties – The League and the Five Star Movement – are eurosceptic and will fight against debt repayment plans, and if inflation keeps rising then Italy might not be able to afford to repay its bond sales. While interest rates could curtail this problem, higher rates would keep treasury bonds attractive and unaffordable for the Italian government.
This lose-lose scenario is the reason for the growing gold demand. Stocks slump so investors move away, but investors dislike uncertainty. Italy’s bond yields are very uncertain in comparison to those from Germany or America, so investors turn to a safe haven asset – gold bullion.
