If you think there is even a smidgeon of rationality left in global financial markets, look no further than the hilarious 60 basis point plunge in the Italian 2-year bond yield this morning. That happened when the populist government’s new finance minister, Giovanni Tria, told an absolute whopper—-namely, that the new government is committed to the euro and that the “public debt will fall”.
Right. And if dogs could whistle, the world would be a chorus!
However, when it comes to the yield on the debt of Italy’s fiscally incontinent government, a “screeching cacophony” is the more apt metaphor. That’s because fake demand for Italian bonds is about to disappear just as a real populist-driven borrowing breakout is about to hit its already tattered fiscal accounts.
Accordingly, the 1.75% yield on the two-year bond — even before this morning’s plunge — was not remotely sufficient to compensate for the fiscal- and redenomination-risk (forced exit from the eurozone) ahead. And that’s to say nothing of the fact that inflation has by no means been abolished in Europe or most anywhere else on the planet — so in real terms the bond’s payment for time and risk is virtually nothing at all.