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.