Italian 2-Year Yields Go Negative

How desperate are investors now in a low-growth, low-interest rate world? They’re lending money to one of Europe’s most free-spending governments and getting negative interest on the loan. By ‘negative interest,’ yes, I mean they’re paying to loan short-term money to the Italians.

Crazy bond investors! Che cosa fai?! Don’t you know Italy is a fiscal basket case? Whatsamattayou?!!

The Italians sold €1.75 billion in 2-year debt at a yield of -0.23. They join an infamous continental club of European debt issuers who now pay zero interest rates to borrow money. The Germans, the Swiss, and the French are already members. Government borrowers must love this new surreal reality. Individual savers and investors who rely on fixed income investments for retirement, well they wouldn’t like it all.

As far as government debt-to-GDP ratios go, Italy is worse than the UK but better than Greece. Italy’s debt-to-GDP ratio is 132.3%. The UK’s is 89.4%. Greece — now in thrall to the IMF, ECB, and the EU (the ‘troika’) — is at 177.1%. Numbers liked that used to scare off investors. But not today. Why?

It’s a low-growth world. And it looks like the European Central Bank is all set to unleash a money flood of some sort at its next meeting on 3 December. Investors are front-running that move by buying short-term government debt now.

Someone should have asked Ben Bernanke about this when he spoke last week at the London School of Economics. We’re living in his world now, where investors are fixated on what central banker say. Asset prices are badly distorted by central bank intervention. The result is a financial horror show. Happy Halloween!

High seas gambling

The Chinese have responded. Not long after the US sailed a destroyer through what China considers its sovereign territory in the South China Sea, official organs of the Communist Party of China punched back. An editorial in China’s Global Times opined that, ‘In [the] face of the US harassment, Beijing should deal with Washington tactfully and prepare for the worst. This can convince the White House that China, despite its unwillingness, is not frightened to fight a war with the US in the region, and is determined to safeguard its national interests and dignity.

There’s that phrase again: national interests. What are they? Who defines them? Are they worth fighting for? That’s why ‘conflict’ is part of our regular beat at Capital and Conflict.

On this specific issue though, how worried does it make sense to be? Surely China and the US are not serious about armed conflict over a bunch of semi-militarised coral reefs? They are massive trading partners with much more to gain by cooperation than by conflict.

But remember your history, dear reader. When was the last time that common sense prevailed in the affairs of nations? Britain and Germany enjoyed close ties at the highest levels of royalty prior to World War One. It was in neither country’s interest — economically speaking — to engage in destructive war. Yet it happened.

Don’t get me wrong. I’m not predicting armed conflict between China and the US. But a hacking war? A currency war? A trade war? Those are all on the table. In a world where everyone is fighting over the small scraps of post-globalisation growth, anything is possible.


Dan Denning,
For Markets and Money, Australia

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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