Monti Effect' Fizzles Before $574 Billion New Year
Comment of the Day

December 22 2011

Commentary by Eoin Treacy

Monti Effect' Fizzles Before $574 Billion New Year

This article by Chiara Vasarri and Lorenzo Totaro for Bloomberg may be of interest to subscribers. Here is a section:
The Rome-based Treasury will sell 9 billion euros of 179- day bills and as much as 2.5 billion euros of zero 2013 bonds on Dec. 28. The next day Italy will auction four different bonds, including a 10-year security.

Italy, the euro area's third-largest economy and second most-indebted after Greece, may hold the key to the single currency's survival. It must repay about 53 billion euros in the first quarter from the region's total maturing debt of 157 billion euros, according to Swiss lender UBS AG. The nation, with 1.9 trillion euros in debt, owes a further 3.2 billion euros in interest payments based on the average five-year yield of the past three months.

“Paradoxically, the only real lever that Monti has is the weakness of Italian government debt,” said Nicola Marinelli, who oversees $153 million at Glendevon King Asset Management in London. “The more yields go up and the specter of a failed auction becomes real, the more he can push for leeway from the parties” that support the government in Parliament.

Eoin Treacy's view Markets tend to be relatively illiquid between Christmas and New Year; with so many people taking a couple of days off. However, it is also worth noting that this period often coincides with periods when trends change direction in one asset class or another. The rationale is not difficult to understand. A few enterprising traders stay in the office over the holidays and because markets are thin they can have a larger influence than would normally be the case.

December 28th will therefore be an interesting day for Italian debt. Bond vigilantes will probably look on this as an opportunity to extend their current run of good fortune. Yields have rallied from 5.5% to 7% this month. If those who wish to support the Italian state want to have an impact on sentiment then a clear downward dynamic, preferably accompanied by a sustained move below 6.5%, will be required to suggest a convincing show of force.

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