{"id":34532,"date":"2018-05-25T07:42:39","date_gmt":"2018-05-25T12:42:39","guid":{"rendered":"http:\/\/olduvai.ca\/?p=34532"},"modified":"2018-05-25T07:42:39","modified_gmt":"2018-05-25T12:42:39","slug":"italian-bonds-tumble-triggering-goldman-contagion-level-as-political-crisis-erupts-in-spain","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=34532","title":{"rendered":"Italian Bonds Tumble, Triggering Goldman “Contagion” Level As Political Crisis Erupts In Spain"},"content":{"rendered":"
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Italian Bonds Tumble, Triggering Goldman “Contagion” Level As Political Crisis Erupts In Spain<\/span><\/a><\/h3>\n<\/div>\n
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When it comes to the latest rout in Italian bonds, which has continued this morning sending the 10Y BTP yield beyond 2.40%, a level above which Morgan Stanley had predicted fresh BTP selling would emerge as a break would leave many bondholders, including domestic lenders with non-carry-adjusted losses…<\/p>\n

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… there has been just one question: when does the Italian turmoil spread to the rest of Europe?<\/strong><\/p>\n

One answer was presented yesterday by Goldman Sachs <\/a>which explicitly defined the “worst-case” contagion threshold level, and said to keep a close eye on the BTP-Bund spread and specifically whether it moves beyond 200 bps.<\/p>\n

Should spreads convincingly move above 200bp, systemic spill-overs into EMU assets and beyond would likely increase. <\/strong>Italian sovereign risk has stayed for the most part local so far. Indeed, the 10-year German Bund has failed to break below 50bp, and Spanish bonds have increased a meager 10bp from their lows. This is consistent with our long-standing expectation that Italy would not become a systemic event. That said, should BTP 10-year spreads head above 200bp, the spill-over effects onto other EMU sovereigns would likely intensify. <\/strong><\/p><\/blockquote>\n

Well, as of this morning, the 200bps Bund-BTP level has been officially breached. So, if Goldman is right, it may be time to start panicking.<\/p>\n

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Ironically, almost as if on cue, just as the Italy-Germany spread was blowing out, a flashing red Bloomberg headline hit, confirming the market\u2019s worst fears:<\/p>\n