As 2Y Italian Bond yields nudge back up against 3% again, the sad euphoria of an ECB-funded cheap loan Sarkozy-Carry-trade in short-dated Italian debt is now a losing proposition for Italian banks. Even accounting for the month of carry earned on the position, the Mark-to-Market on any short-dated (less-than-three-year maturity) Italian government bond purchased with LTRO funds is now a drag on Italian bank balance sheets. Spain, of course, is even worse. The somewhat dashed hopes for an LTRO3, given the ever-diminished pile of performing collateral (and the Bundesbank/ECB split on acceptable collateral), suggests the situation is likely to only get worse leaving the defection-strategy - sell yr BTPS - (no matter its contagious impact on the sovereign itself) as optimal for Italian banks to avoid further forced balance sheets losses (which of course it won't since these bonds are never MtM'd and accrued at Par in the banking books we are sure).
2Y Italian Bond Prices are now below any price after LTRO2 meaning losses on any Italian bank holdings in this carry-trade...
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And 2Y BTP yields are testing 3% once again...with similar euphoria/dysphoria reaction as in the summer of 2011...
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Charts: Bloomberg