Italian Bond Yields Soar, Financial Shares Sink

Joel Anderson  |

Yields on Italian treasury bonds soared past the 7 percent mark, considered by many investors and analysts to be a crucial threshold, reaching 7.46 percent for 10 year notes. As the price of borrowing money increases for the troubled Italian government, financial stocks across Europe took a serious beating as the newest chapter in the European debt crisis stoked fears of a disorderly default by Europe's fourth largest economy reached all-time highs.

Crisis in Italy

Markets responded well yesterday to news that Italian Prime Minister, Silvio Berlusconi had agreed to resign after his government passes important austerity reforms to meet EU demands in the next few days. However; concern over what direction the Italian government would take next led global markets into a free fall. Berlusconi, though, has insisted on holding elections rather than appointing a technocrat to oversee an interim government. This could mean mean weeks or even months of flux in the Italian government, a period that could lead to further disorder and drive bond yields even higher. Italy is large enough that a collapse and default would threaten the entire European union, unlike Greece. Additionally, the nations debt exceeds what the Euro Zone has the capacity to bail out. That debt, now some $2.6 trillion, is 120 percent of Italy's GDP.

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The 7 percent threshold on bond yields is a key metric, as both Ireland and Portugal were forced to accept bailouts after their own cost of borrowing reached those levels. The potential for the relative chaos of an election at this crucial juncture appears to have spooked the markets, but the European Central Bank, or ECB, is reported to be aggressively buying Italian Treasury Bonds in an effort to prop up the price as much as possible. Italy has another $6.87 billion in one-year bills set to go to auction Thursday and needs to raise $412 billion over the course of 2012.

European Banks Hit Hard

Predictably, the hardest hit by the spiking yields on Italian bonds were major European banks, who all saw their shares plummet amid the bad news and bleak outlook. Hardest hit was Dutch insurer ING Groep NV (ING) which gaped down nearly 12 percent to start the day and stayed put. They had company, though, as fellow Dutch insurer Aegon N.V. (AEG) also plummeted close to 10 percent as well. Also seeing serious losses in share price were the German Deutsche Bank AG (DB), down nearly 9 percent, English Barclays PLC (BCS), off over 8.5 percent, The Royal Bank of Scotland (RBS), off over 8.5 percent, and the Swiss Credit Suisse (CS), which dropped over 8 percent.

The terrible news for most of the world, though, is welcomed by any doom and gloom investors who had the foresight to short the financial markets before news of the potential elections in Italy. Shareholders of Direxion Daily Financial Bear 3X Shares (FAZ), a leveraged, inverse ETF that seeks results that match the daily performance of the Russell 1000 Financial Services Index, only in the opposite direction and at 300 percent of the index's movement, saw the panic in Europe boost their value by nearly 9 percent.

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