Italian Treasury Intervenes To Buy Bonds For Third Time Since May Crash

Italian bond prices rose on Monday after the Italian Treasury announced on Friday that it had intervened in the market with yet another debt buyback operation following a steep price decline on Friday.

Unwilling to wait for the ECB's generosity, late last week the Italian government bought back nearly €1bn of its own short-dated debt late last week amid concerns of another breakdown in relations with Brussels after the country’s populist coalition launched negotiations over its debut budget, prompting a sell-off.

It was the treasury’s third - and largest to date - intervention in the bond markets since the coalition took power in late May, an event which stunned investors resulting in a record plunge in Italian bond markets and a slide in Italian risk assets.

The intervention propped up yields on 2-year Italian bonds, which dropped to 0.92% in Monday trading, after blowing out as much as 1.35% on Friday. Longer-dated debt also saw selling pressure ease, with the yield on 10Y Italian paper dropping to 2.9%, down from 3.1% on Friday.

As shown in the chart below, the Italian Treasury has intervened at the bottom of every recent selloff to avoid further losses.

The interventions highlight the fragile nature of the Italian bond market’s structure, the FT notes.

During May’s sell-off, numerous hedge funds suffered dramatic losses when the sudden plunge triggered many stop-loss levels. This forced selling exacerbated the price falls, along with very thin liquidity, "a dynamic that experienced investors said was in play again during last week’s sell-off."

Some speculated that the Italian Treasury had stepped into the market to act as a buyer in a bid to ease that liquidity crunch, and they turned out to be correct.

Justifying its market intervention, the Treasury said it was simply using up spare cash when in reality it has become the buyer of last resort preventing an out-all out rout for the Italian bond market. And with the ECB's QE tapering and coming to an end in less than 5 months, it is likely that Italian bond volatility will only get worse.

Comments

ssk81646 BaBaBouy Mon, 08/06/2018 - 09:50 Permalink

 

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In reply to by BaBaBouy

FireBrander ssk81646 Mon, 08/06/2018 - 09:54 Permalink

1. Lock the border and ports and shut down ILLEGAL "Immigration".

Result: Italians chear and the "immigrants" head for Spain, France, etc.

 

2. End all "financial support" to ILLEGAL ALIENS in Italy.

Result: They all jump a train to Germany, France, Spain, Sweden...SEE YA!

 

3. If Brussels complains, tell them to Fuck Off and begin warming up those Lira printing presses and start talking about how Italy's debt is due to abusive/predatory behavior on the part of Germany; that uses the EU to run/enforce it's strip mining operation of it's "poorer" neighbors.

 

4. Make Italy, Italy again and not a Vassal of the EU/Germany/France.

 

In reply to by ssk81646

DarkPurpleHaze Mon, 08/06/2018 - 09:45 Permalink

I think Italy is ready to step outside of the EU quicker then most realize if it starts spiraling.

The recent partnership with Trump will eventually come into play and pay dividends but at the expense of the EU.

Italy is Trump's EU wedge. One word from Trump and this could get interesting pretty quick.

Catullus Mon, 08/06/2018 - 09:48 Permalink

It’s kind of brilliant. You issued debt at par. The debt drops in price, you buy it back and retire it. 

It also speaks to the silliness of bailouts. You can let the bonds collapse and buy them back on the secondary markets. But we’re always told the CBs “had to do something”. Nonsense. 

I would have bought my own mortgage back at .30 to par if I could have in 2008. But we weren’t allowed. The banks balance sheets had to come first. The ECB is not bailing out Greece or Italy or Spain. They’ve been bailing out banks that owned their bonds. 

Balance-Sheet Catullus Mon, 08/06/2018 - 15:00 Permalink

It is true, you are not a large money center bank that may be deemed essential to the credit system. Small banks are folded all the time and for 100 years failed larger banks have been folded into other larger banks for purposes of consolidation, and rationalization as the two married banks spend years straightening out and restructuring.

Reason is most countries wish to rely on the private banking system whether publicly traded or not to issue most new credit and to service those newly originated loans so the core banks must be conserved. Troubled assets are securitized and sent on to the CBs as was done in the US.

In Italy it appears that at the CB is purchasing Italian Gov debt to regulate and perform the role of market maker. These 'packages' may be sold on to the ECB or elsewhere  at some point or be allowed to administratively evaporate/mature.

In reply to by Catullus

ssk81646 Mon, 08/06/2018 - 09:50 Permalink

 

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pods Mon, 08/06/2018 - 09:52 Permalink

So, Italy needs money so it sells debt to raise money, but cannot afford the coupon so they buy debt to depress yields thus allowing them to sell debt to raise the money needed to buy the debt to depress yields so they can sell the debt to raise the money........

Snake, meet tail.

1033eruth Mon, 08/06/2018 - 10:55 Permalink

Isn't it fascinating how the role of government has morphed into intervening in financial markets?  But MORE importantly how the citizens of said country accept it as a normal role of government?  This is one of millions of perfect examples of the Boiled Frog.  

Balance-Sheet 1033eruth Mon, 08/06/2018 - 15:11 Permalink

WW1 and WW2 completely destroyed Europe and though the economy revived 1945-1970 more or less Europe has remained on this sort of life support machinery to extend its life. It cannot be unplugged or it will die and rapidly go into decomposition like a corpse.

This may strike some as a good idea but there is no grave large enough to bury Europe so the consequences of pulling the plug on the air and water supplies is making people cautious.

 

In reply to by 1033eruth

To Hell In A H… Mon, 08/06/2018 - 11:10 Permalink

The Itlaian Central Bank is the buyer of 1st resort and despite Southern European PIIGS being bankrupt beyond repair, the international FOREX markets never adjusts the Euro? The markets are so rigged to the point they are a fucking joke.

Balance-Sheet Shibboleth Mon, 08/06/2018 - 15:05 Permalink

A central bank simply swaps cash for the bonds it receives from the sellers/primary dealers. These dealers will simply have an account at the Italian CB, the CB accepts the bonds, deposit the amount in Euro cash in the bond dealer's account.

If you live in the USA the Federal Reserve System does the same thing when it takes US Treasury Bills off the market and out of circulation.

Q?

In reply to by Shibboleth