Italy Yields

Italian government bond yields

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What's going on?

Just eight months ago, 2-year Italian government bonds were offering investors a return of over 1.5%. By Tuesday, that yield had fallen so much that it became negative.

What does this mean?

Late last year, Italy was in the throes of tense negotiations with the European Union over its spending plans. The country wanted to add to its already mountainous debts, increasing the risk that existing bonds wouldn’t be repaid, rather than reduce them as Europe wanted. The two reached a compromise – but recent elections reignited investors’ worries that Italy might overspend anyway.

On Tuesday, Italy’s government actually cut the amount it plans to spend beyond its means this year and will probably avoid European sanctions as a result. Investors have been enjoying a government bond love-in; in Europe, they’ve largely bought German ones. And now Italian bonds have joined the party: they likely appear safer and therefore more attractive to investors, whose buying pushed their prices up and yields into negative territory (as the two move inversely).

Why should I care?

The bigger picture: Giving UK investors somewhere to hide.

Data released on Tuesday showed that activity in the British construction sector last month fell to its lowest level in over a decade. Companies blamed a lack of confidence in the economy’s prospects for the slowdown, as well as the uncertainty around how Brexit will be resolved (join the club). Housebuilding in particular slowed abruptly, falling by the most in three years. Fewer people potentially coming to the UK after it departs the European Union and people already leaving could mean lower future demand for property.

Zooming out: Not so fast, Europe.

Half of investors are expecting the European Central Bank to lower eurozone interest rates this month, and everyone thinks they’ll be cut by September. A new president will take the reins in October. Europe had been divided on who that would be, and how she should behave at any rate.

Originally posted as part of the Finimize daily email.

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