While today for now things have calmed down, yesterday was a very rocky day for world markets as the Dow was down almost 400 points and most other world wide indexes went the same way. What was really quite astonishing and most telling, Italian bond prices surged-meaning investors are now demanding much higher premiums to buy Italian debt.
The 10-year benchmark bond started the day below 7% but jumped to around 7.5% before retreating slightly. But what was far more paradoxical, the 2-year rose higher than the 10-year and even the 12-month treasury bill shot up at one point to over 9% a sign of dangerous iliquidity in the market. Basically few wanted to buy Italian debt. Berlusconi's stepping down has not restored confidence, at least not yet, as he suggested in stepping down.
While the yields on Italian bonds might seem attractive at such generous rates, paradoxically when you factor in the "fear premium" this is not the case, "Paradoxically, they would offer better value if they were yielding 4% or 5%," because that would reflect a more stable environment, said Jack Kelly, investor director for government bonds at Standard Life Investments in Edinburgh, Scotland. (See today's Wall Street Journal, pg. A8)
Prior to this big investors felt safe owning big stakes of Italian debt because they knew they could sell them without much difficulty-this has changed.
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