LONDON (Reuters) - Italy’s bond yield spread over its German equivalent stretched to its widest for nearly a year on Friday and the spread over Spain hit crisis-era levels on fears over the spending policies and eurosceptic outlook of the incoming Italian government.

The closely watched Italy-Germany 10-year spread, seen by many investors as a proxy for sentiment towards the euro zone, widened to 200 basis points (bps) for the first time since June. IT10YT=RR DE10YT=RR.

Italian Prime Minister-designate Giuseppe Conte this week began putting together his cabinet team, with party leaders pushing for eurosceptic economist Paolo Savona to be given the pivotal post of economy minister.

Meanwhile, the equivalent Italy-Spain 10-year spread, also watched by some investors as a measure of political risk in the bloc, hit 100 bps for the first time since January 2012. IT10YT=RR ES10YT=RR

It surged to 106 bps, before tightening again after an 8-bps in Spanish 10-year government bond yields on news that Spanish Prime Minister Mariano Rajoy could face a no-confidence motion.

This Italy-Spain spread is watched because of the similarity in size and credit rating between the two southern European countries, so any significant difference in borrowing costs is considered a sign of a market under pressure.

Increasing concerns over a potential new Italian government comprising of anti-establishment parties 5-Star Movement and the League is primarily responsible for pushing these spreads wider in recent weeks.

Weakness in euro zone growth, as indicated by a recent disappointing set of PMI data, is also hurting the peripheral European bond market, analysts said.

“There’s still a lot of uncertainty over Italy’s fiscal policy. The thought of Savona as economy minister could be a factor but the main reason is the worries over this spending policy,” DZ Bank analyst Sebastian Fellechner said.

DZ Bank analysts believe the Italy-Germany 10-year bond yield spread, which was as low as 112 bps last month, might go as wide as 250 bps if a new Italian government goes on a spending spree as promised.

“I expect a second major (widening) movement when the government will begin its work,” Fellechner said.

Meanwhile, Germany’s 10-year government bond yield dipped further to hit new 4-1/2 month lows of 0.44 percent, after the collapse of a summit between the United States and North Korea sparked a bid for safe haven assets.

U.S. President Donald Trump on Thursday called off a summit with North Korean leader Kim Jong Un set for next month, citing Pyongyang’s “open hostility”, and warned that the U.S. military was ready in the event of any reckless acts by North Korea. </s> LONDON, May 25 (Reuters) - The gap between Italian and German 10-year government bond yields stretched to its widest level since June 2017 as uncertainty over an incoming government continued to weigh on the debt outlook in the euro zone’s third largest economy.

Italian Prime Minister-designate Giuseppe Conte this week began putting together his cabinet team, with party leaders pushing for an 81-year eurosceptic economist to be given the pivotal post of economy minister.

The prospect of an anti-establishment Italian government has pushed the Italy/Germany 10-year government bond yield spread about 60 basis points wider since last Wednesday, May 16.

On Friday, the spread widened further to 196.8 basis points, the highest since June 2017. (Reporting by Abhinav Ramnarayan; Editing by Saikat Chatterjee) </s> * Italy/Spain yield gap hits 100 bps for first time in six years (Writes through)

LONDON, May 25 (Reuters) - The gap between Italian and German 10-year government bond yields pushed out to 200 basis points on Friday for the first time in nearly a year as fears over the spending policies and eurosceptic outlook of the incoming government hit sentiment.

The closely watched spread between two of the euro zone’s largest countries, seen by many investors as a proxy for sentiment towards the euro zone, has widened by more than 30 bps this week .

Italian Prime Minister-designate Giuseppe Conte this week began putting together his cabinet team, with party leaders pushing for 81-year eurosceptic economist Paolo Savona to be given the pivotal post of economy minister.

Meanwhile the equivalent Italy/Spain 10-year spread, also watched by some investors as a measure of political risk in the bloc, hit 100 bps for the first time since January 2012.

This spread is watched because of the similarity in size and credit rating between the two Southern European countries, so any significant difference in borrowing costs is considered a sign of a market under pressure.

Increasing concerns over a potential new Italian government comprising of anti-establishment parties 5-Star Movement and the League is primarily responsible for pushing these spreads wider in recent weeks.

Weakness in euro zone growth, as indicated by a recent disappointing set of PMI data, is also hurting the Southern European bond market, analysts said.

“There’s still a lot of uncertainty over Italy’s fiscal policy. The thought of Savona as economy minister could be a factor but the main reason is the worries over this spending policy,” said DZ Bank analysts Sebastian Fellechner.

DZ Bank analysts believe the Italy/Germany 10-year bond yield spread, which was as low as 112 bps last month, could go as wide as 250 bps if a new Italian government goes on a spending spree as promised.

“I expect a second major (widening) movement when the government will begin its work,” Fellechner said.

Meanwhile, Germany’s 10-year government bond yield dipped further to hit fresh 4-1/2 month lows of 0.45 percent, after a collapse of a summit between the United States and North Korea sparked a bid for safe haven assets.

U.S. President Donald Trump on Thursday called off a historic summit with North Korean leader Kim Jong Un scheduled for next month, citing Pyongyang’s “open hostility,” and warned that the U.S. military was ready in the event of any reckless acts by North Korea. (Reporting by Abhinav Ramnarayan; Editing by Hugh Lawson) </s> Rome, May 24 - The spread between Italy's 10-year BTP bond and the German Bund rose to 195 points after anti-migrant Euroskeptic League leader Matteo Salvini said he intended to do "the opposite of what the EU has threatened Italy with for the past few years". It later dipped to close on 191. The yield went up to 2.4%, a level it last reached at the end of 2014, before dipping to 2.38% by the close. The spread had earlier dipped to 177 on better expectations from the incoming government. There was pressure on Spanish and Portuguese bonds too. The spread has been rising on fears about the eurozone's first populist government coming to Italy, in an alliance between the League and the anti-establishment 5-Star Movement. The lower the spread is, the better it is for the Italian economy and debt-servicing costs. The spread rose above 200 points last year on EU populist fears in France and other countries. </s> According to a widely reprinted and circulated report in the Wall Street Journal, for the first time since 2000, U.S. government bonds now yield more than all of their developed world counterparts. Looking just at the 10-year security, the yield on the benchmark Treasury note now yields more compared to a record number of countries, and the yield differential between the U.S. government note and its German bund counterpart is its widest in almost 30 years.

Basically, this means that the arguably safest investment available anywhere in the world – the one American business schools still hold up as a “riskless” benchmark – yields way more than most other sovereign debt, including Italy’s, Canada’s and Australia’s – but no, not Greece’s, although they’re not too far off.

Let’s look at the numbers.

As of May 22, the 10-year U.S. Treasury note was yielding 3.06%. Since breaking through the 3.0% barrier on May 14, the yield has remained mostly above that level ever since, hitting a high of 3.12% on May 17. That’s the first time the yield has stayed above the 3.0% level more than a day or so since 2011. While the yield has since come back down recently to below 3.0%, I think it’s more likely to hit 3.10% again before it moves much below 3.0%.

So how does that stack up to other developed country sovereign bond yields?

Using May 22 closing levels, the German bund – the benchmark for the eurozone – yields just 0.56%, or 250 basis points below the U.S. note. The Japanese 10-year bond yields just 0.05%. Elsewhere, 10-year U.K. gilts yield 1.52% -- half of what Uncle Sam pays – and Swiss bonds yield just 0.10%. Greece is at 4.39%, although that’s down sharply from recent years.

Even yields on Italian sovereign bonds, which have recently soared as an anti-establishment coalition seeks to form a government and return Italy to its financially-profligate ways, are way lower than their U.S. counterparts. The 10-year Italian government bond was recently trading at more than 2.40%, its highest level in four years. And yet it still yields a good 60 bps below what full faith and credit U.S. bonds yield.

Well, yes and yes.

Interest rates and bond yields, as we know, are a product of not only credit risk but also supply and demand and the cost of money. The U.S. passes the credit risk test with flying colors – not because our government is so fiscally responsible (it surely isn’t) but because it has the power to tax its citizens and businesses as much as it can get away with or, when that fails or isn’t enough, print and borrow more money. Few nations on earth can get away with that without creating hyperinflation.

Which leads to the second factor, supply and demand, and that’s where we see the reason for high U.S. borrowing rates.

 Uncle Sam is in debt by more than $21 trillion, far and away the most of any nation on earth. Indeed, America’s external debt is larger than the next three countries’ total combined: the U.K. at $8.5 trillion, France at $5.7 trillion, and Germany at $5.4 trillion.

In other words, the world is flooded with U.S. government debt. There’s obviously a price to pay to get people to buy it all.

Actually, the U.S. is pretty fiscally responsible compared to its developed world counterparts. That $21 trillion in external debt roughly equals the size of U.S. GDP. That’s a trivial percentage compared to 313% for the U.K., 213% for France, and 141% for Germany. Surprisingly, Italy’s sovereign debt to GDP ratio is only 124%.

Of course, there’s another big factor that puts upward pressure on U.S. yields, and that is monetary policy. While the U.S. has pretty much moved past the financial crisis and the Federal Reserve has at least started the process of raising interest rates and unwinding its massive balance sheet, the rest of the world still acts like their economies are in dire straits.

For example, the European Central Bank’s main interest rates are still at their record lows set two years ago, with the deposit facility at negative 0.40% and its main refinancing rate at zero. The Bank of Japan’s key short-term interest rate remains at a record negative 0.10%. Both central banks have shown no indication when they might start raising rates or unwinding their own giant bond portfolios. The Bank of England raised its short-term rate last November but hasn’t made any similar moves since.

In other words, while the Fed is trying to normalize monetary and interest rate policies, albeit very slowly, the rest of the developed world shows no inclination to follow along. Interest rates are being kept deliberately and artificially low, and may remain that way for who knows how long?

So what’s the takeaway from all this? Despite falling this week, I think U.S. interest rates and government bond yields are likely headed higher, which will make the yield differential with the rest of the world even wider. With practically no credit risk, U.S. government bonds appear to present tremendous value, at least against their global counterparts.

Visit back to read my next article!

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion. </s> Many of my recent articles start with some kind of motivation. I'll see something in the news and decide it will make a great Seeking Alpha piece.

Today's article was motivated by Argentina's sale of 100-year bonds denominated in US dollars. For those that don't know, Argentina is a serial defaulter and any investor with sense wouldn't lend them a dime. But we'll get to them later on.

The point of this commentary is to present my belief that bond markets around the world are mispricing risk and do not send useful signals on inflation. This is mainly due to unprecedented Central Bank intervention since 2008 and short investment memories.

I just wrote a piece on the US Bond Market (located here) that shows bonds are the new Certificates of Confiscation. This is a sarcastic way of saying that yields are significantly below the "real" rate of inflation when you look at the large expenditures made by the average person.

Below are a few charts of rent and healthcare that I used in the original piece to make the point. Steadily rising rents and health care premiums are taking a big bite out of your income.

To be fair to the US, I believe the Federal Reserve realizes they've blown several economic bubbles and are trying to rectify that by raising short term rates and allow their balance sheet to rolloff.

Still, yields are very low. As of this writing, the Ten Year US Treasury Bond yields a whopping 27 basis points above the official CPI figure.

ECB intervention has also driven down yields in Europe. Investors buy the bonds and front run their sale back to the ECB.

The result is the Italian 10 Year Bond yields 1.93% as of this writing. That is actually less than the United States!

Well, maybe Italy has really low debt levels that justify this?

Nope. Italian Debt-to-GDP is well over 100%.

This is not a country I would lend to for 10 years at 1.93%.

Finally, let's move on to Argentina, the country that started this article.

To recap, Argentina has defaulted on its debt SEVEN times since the country's independence 200 years ago. The 2001 debt default made international news due to the chaos it caused in the country.

So, when I read that they wanted to sell a 100 Year Bond (not a typo), I was sure no one would buy it. Who would buy a 100 Year Bond from a country that is a serial defaulter?

Well, look at the article I read this morning. The offering was 3-times over-subscribed!!!!

The global bond market has been seriously impaired by years of Central Bank intervention. I don't know how you look at the data above and conclude otherwise. Something is wrong when a serial defaulter like Argentina can sell 100 Year Bonds three times oversubscribed.

Most perplexing is those still using bond yields to make a point about the economy and markets in general. Bond markets are misrepresenting inflation risk (in places like the United States) and basic credit risk (in places like Argentina).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. </s> , Rome, Italy, Aug 8 – Italy’s coalition government was in crisis Friday after far-right Interior Minister Matteo Salvini pulled his support and called for snap elections.

The heightened political tensions in the heavily-indebted country — the eurozone’s third largest economy — rattled financial markets, where yields rose on Italian government bonds.

Prime Minister Giuseppe Conte, who has held several rounds of talks to try to ease the crisis in the 14-month-old government, angrily called on Salvini to justify his move.

Salvini has clashed frequently in recent weeks with his fellow Deputy Prime Minister Luigi di Maio of the anti-establishment Five Star Movement (M5S) over a range of policies.

He upped the pressure Thursday, saying there was no longer a majority to support a government and calling for new elections.

“Let’s go straight to parliament to say there is no longer a majority… and quickly go back to the voters,” Salvini said.

The move sparked a crisis described by the left-wing newspaper La Repubblica as “a farce that makes no-one laugh”.

Conte, who has held separate talks with Salvini and President Sergio Mattarella, went on the offensive, saying it was not for the firebrand interior minister to summon parliament.

He called on Salvini “to explain to the country and justify to the electorate, who believed in the possibility of change, the reasons that brought him to abruptly interrupt” the activities of government.

Both houses of parliament are currently on recess for the holidays and are not due back until September.

Long-rumbling tensions between the coalition’s populist leaders have peaked in recent days, with a row over the financing of a multi-billion-euro high-speed train line between the Italian city of Turin and Lyon in neighbouring France.

On financial markets, the yield on 10-year government bonds jumped to 1.8 percent from over 1.5 percent on Thursday while the spread between Italian and German bonds jumped to 233 basis points.

“This government has been over for a while,” political analyst Stefano Folli told AFP.

“What’s clear is that in a few months time we’ll have a right-wing government, for the left is weak and the M5S is in crisis.

“It will be a hard-right one, born of a fairly explicit challenge to the European Union,” he said.

The left vowed not to roll over, with former prime minister Paolo Gentiloni tweeting that Salvini was “asking for full powers to take us out of Europe. It will not happen”.

An early election would benefit Salvini, with opinion polls putting his League party ahead, leaving open the possibility that it could govern in alliance with another, smaller far-right party, Fratelli d’Italia (Brothers of Italy).

It reflects a change in fortune for Italy’s coalition partners since last year, when M5S took 32 percent of the vote at the general election, and the League 17 percent.

In the European elections in May this year, the League took the most votes in Italy with 34 percent against 17 percent for M5S.

Di Maio said his M5S party “is ready” to return to the polls.

Italian media has reported that Salvini, in earlier talks with Conte, set conditions for staying in the coalition — including the resignation of the transport, defence and economy ministers, who have resisted his projects and policies.

The opposition has also called on the government to resign, arguing it no longer has a workable majority in parliament.

But Mattarella, who has the sole power to dissolve parliament, insists there must be a government in place to finalise the budget, a first draft of which has to be submitted to EU authorities by the end of September.

To that end, he could name a government of technocrats and push elections back to February or March, although this would be unpopular with Italians.

The government is struggling to rein in its budget deficit and a mammoth debt mountain of more than 2.3 trillion euros.

Federico Santi, senior Europe analyst with Eurasia Group, said a League-Brothers government would “have a more explicitly pro-business outlook, but an even more virulently nationalist and eurosceptic orientation” than the present one.

Italian news agency AIG said on Thursday the Senate could convene as early as August 20 to declare the end of the government, with the dissolution of parliament possible in the following days.

According to Italy’s constitution, new elections would then have to be held within 70 days. </s> Rome, Aug 9 (UrduPoint / Pakistan Point News - 9th Aug, 2019 ) :Italy's coalition government was in crisis Friday after far-right Interior Minister Matteo Salvini pulled his support and called for snap elections.

The heightened political tensions in the heavily-indebted country rattled financial markets, where yields rose on Italian government bonds on Friday.

Italy's Prime Minister Giuseppe Conte, who has held several rounds of talks to try to ease the crisis in the 14-month old government, angrily called on Salvini to justify his move.

Salvini has frequently clashed with his fellow Deputy Prime Minister Luigi di Maio of the anti-establishment Five Star Movement (M5S) party over a range of policies.

He stepped up the pressure on Thursday, saying there was no longer a majority to support a government and calling for new elections.

"Let's go straight to parliament to say there is no longer a majority... and quickly go back to the voters," Salvini said.

The move sparked a political crisis described by the left-wing newspaper La Repubblica as "a farce that makes no-one laugh".

Conte, who has held separate talks with Salvini and President Sergio Mattarella, went on the offensive, saying it was not for the firebrand interior minister to summon parliament.

"It's not up to him to dictate the steps of the political crisis," he added.

Conte called on Salvini "to explain to the country and justify to the electorate, who believed in the possibility of change, the reasons that brought him to abruptly interrupt" the activities of government.

Both houses of parliament are currently on recess for the holidays and are not due back until September.

Long-rumbling tensions between the coalition's populist leaders have peaked in recent days, with the row centred on the financing of a multi-billion-euro high-speed train line between the Italian city of Turin and Lyon in neighbouring France.

On financial markets, the yield on 10-year government bonds jumped to 1.738 percent from 1.530 percent on Thursday while the spread between Italian and German bonds jumped to 233 basis points. </s> When it comes to the latest rout in Italian bonds, which has continued this morning sending the 10Y BTP yield beyond 2.40%, a level above which Morgan Stanley had predicted fresh BTP selling would emerge as a break would leave many bondholders, including domestic lenders with non-carry-adjusted losses...

... there has been just one question: when does the Italian turmoil spread to the rest of Europe?

One answer was presented yesterday by Goldman Sachs which explicitly defined the "worst-case" contagion threshold level, and said to keep a close eye on the BTP-Bund spread and specifically whether it moves beyond 200 bps.

Should spreads convincingly move above 200bp, systemic spill-overs into EMU assets and beyond would likely increase. Italian sovereign risk has stayed for the most part local so far. Indeed, the 10-year German Bund has failed to break below 50bp, and Spanish bonds have increased a meager 10bp from their lows. This is consistent with our long-standing expectation that Italy would not become a systemic event. That said, should BTP 10-year spreads head above 200bp, the spill-over effects onto other EMU sovereigns would likely intensify.

Well, as of this morning, the 200bps Bund-BTP level has been officially breached. So, if Goldman is right, it may be time to start panicking.

Ironically, almost as if on cue, just as the Italy-Germany spread was blowing out, a flashing red Bloomberg headline hit, confirming the market’s worst fears:

This confirmed reports overnight that Spain's biggest opposition party, the PSOE or Socialist Party, was pushing for a no-confidence motion again Spain's unpopular prime minister. The no-confidence call follows the National Court ruling on Thursday that former Popular Party officials had operated an illegal slush fund, as a result of which nearly 30 people were sentenced to a total of 351 years in prison.

And while Spain's anti-establishment party Podemos has already called for a Raoy no-confidence vote, the Socialist Party joining that call makes this outcome more likely, but would still need the support of one more party as just these two do not guarantee Rajoy's exit, and a Rajoy overthrow depends on the participation of market-friendly party Ciudadanos, Spain's 4th largest party.

Well, following this headline, Rajoy's political future suddenly appears to be over as Ciudadaons, which holds the balance of power in Spain's government, just gave the PM a thumbs down.
• CIUDADANOS WILLING TO BACK NO-CONFIDENCE VOTE AGAINST RAJOY

Immediately after the news, the selling started with Spain's 10Y bonds erasing day's gains, with the yield now higher by 4bps on the day, while Spain's Ibex slumped, falling as much as 0.9%.

Which means that, while independent of the Italian bond rout, Europe's political crisis may very soon have not one epicenter, but two: Rome and Madrid.
The yield spread between the Italian and German 10-year government bonds rises to over 2% for the first time in a year, due to the political uncertainty.