Can Italian rates still be pushed higher?

Posted on 22. Apr, 2013 by Jean Jacques Ohana in Weekly Focus | Comments Off

In the past weeks, it has become hard to envision a scenario that could cause peripheral rates to go up. However serious the political gridlock in Italy, however gloomy the growth prospects in Europe, however nervous the commodities and stock markets, the downside of Euro zone peripheral debts could never materialize.

We have observed four serious sell offs in European equities in April. None of them has seen a significant rise in Italian or Spanish rates (Table 1). This is all the more surprising that peripheral debts so far behaved like “risk on” assets in the equities downside (Table 2, Figures 1 and 2).

In a previous post, we explained that the EURJPY parity has shown a clear negative correlation with Italian rates. This suggests that Japanese investors have shown a strong appetite for Euro zone peripheral debts. This phenomenon probably gained traction since the Bank of Japan (BOJ) announced the largest liquidity injection ever carried out by a Central Bank in a developed country. A plausible explanation to the observed resilience of Italian and Spanish debts to equities downside could be that Japanese peripheral bond holders are far less wary of political risk and benign liquidity stresses than domestic investors.

If the following weeks confirm this trend, the risk premium attached to peripheral sovereign debts could vanish, which would translate in a drastic fall in peripheral sovereign rates. This scenario is also supported by the upward dynamics of the euro and the looming deflation in the euro zone.

Table 1: Performance of European equities and sovereign debts in April 2013. We use baskets of different maturities for each sovereign debt (Barclays Italy for Italy, Barclays France for France…)

date

Euro Stoxx

Italian debt

Spanish debt

French debt

German debt

02/04/2013

2.1%

0.8%

0.5%

0.0%

-0.1%

03/04/2013

-1.5%

0.2%

0.2%

0.1%

0.1%

04/04/2013

-0.7%

0.2%

0.1%

0.5%

0.2%

05/04/2013

-1.4%

0.7%

0.8%

0.9%

0.4%

08/04/2013

0.2%

0.5%

0.2%

0.2%

-0.1%

09/04/2013

0.2%

-0.2%

0.1%

-0.3%

-0.2%

10/04/2013

2.6%

0.0%

0.3%

-0.4%

-0.3%

11/04/2013

0.5%

-0.2%

-0.2%

0.0%

-0.1%

12/04/2013

-1.5%

-0.1%

-0.1%

0.1%

0.3%

15/04/2013

-0.3%

0.1%

-0.1%

0.1%

0.1%

16/04/2013

-0.6%

0.0%

0.0%

-0.1%

-0.2%

17/04/2013

-2.1%

0.4%

0.3%

0.2%

0.2%

18/04/2013

0.1%

0.1%

0.0%

-0.1%

0.0%

19/04/2013

0.8%

0.2%

0.2%

-0.1%

-0.1%

 

Table 2: Performance of European equities and sovereign debts in March 2013. We use baskets of different maturities for each sovereign debt (Barclays Italy for Italy, Barclays France for France…)

date

Euro Stoxx

Italian debt

Spanish debt

French debt

German debt

15/03/2013

-0.7%

0.1%

-0.3%

0.1%

0.0%

18/03/2013

-0.7%

-0.4%

-0.3%

0.2%

0.0%

19/03/2013

-1.2%

-0.5%

-0.3%

0.2%

0.0%

20/03/2013

1.4%

0.2%

0.3%

-0.1%

-0.2%

21/03/2013

-0.9%

0.3%

0.5%

0.2%

0.1%

22/03/2013

-0.1%

0.3%

0.0%

-0.1%

-0.1%

25/03/2013

-1.2%

-0.4%

-0.4%

-0.1%

0.1%

26/03/2013

-0.3%

-0.1%

0.1%

-0.1%

0.0%

27/03/2013

-1.1%

-1.0%

-0.7%

0.2%

0.4%

28/03/2013

0.4%

0.3%

0.1%

0.0%

-0.1%

29/03/2013

0.0%

0.0%

0.0%

0.0%

0.0%

 

Figure 1: Daily performances of Italian sovereign debts (y-axis) against Euro Stoxx 50 (x-axis) since 2012. The April 2013 days are marked in red color.


 

Figure 2: Robust tail correlation of Italian and Spanish debts to Euro Stoxx 50 in the equities’ worst decile with a rolling window of 250 days.

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