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10 year bonds continued moving higher, floating between 6.3% and 6.4%. These are very high and unsustainable levels. These benchmark bonds are important, but the bigger drama is in the shorter term bonds, where significant and worrying breakouts have been made, but they were not always noted.

The ECB is active in buying Italian bonds. But it is not the only difference: The short term yields are also going wild:

  • 5 year Italian bond yields are above 6% (at 6.16% at the time of writing) after sitting under 5% until the recent crisis and under 4% before August.
  • 2 year Italian bonds are above 5.50%. They were under 4.5% until the recent crisis and below 3% before August.
  • 1 year Italian bonds yields skyrocketed above 5%. They were capped under 4% until recently and under 2.5% before August.

There are three main factors playing against Italy:

  1. Berlusconi didn’t deliver: Pressure mounted on the Italian Prime Minister during the EU Summit.  Silvio Berlusconi wanted to bring a small present to the G-20 Summit – more reforms. Unfortunately, Berslusconi couldn’t get the desired support from his coalition.
  2. The ECB is part of the market: it puts pressure on Italy when it wants to, releases it when it wants to also sends messages to Italy on what it should do.
  3. The magnitude of the Greek crisis, with the referendum in December is adding to the pressure.
Italy is not only the biggest domino in the European debt crisis, but seems to be the immediate one, ahead of Portugal, Spain and Ireland.
This has a strong impact on the euro. For more on the common currency, see the EUR/USD forecast.
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