Italian Bonds Rise to Post LTRO-High, Data to Decide Next Move

Italian 10-year bond yields rose Tuesday to the highest level since the European Central Bank (ECB) launched the Longer-term Refinancing Operations (LTRO's) earlier in 2012. The move higher in yields can largely be attributed to fears that Spain may need a full sovereign bailout and Italy may be in line after the Iberian nation.

Benchmark Italian 10-year bonds climbed as high as 6.514 percent early Tuesday on the fears in Spain. As the chart below shows, this is the highest level since the ECB launched the LTRO's, providing 3-year, 1 percent loans to troubled financial institutions in hopes of jump starting the then frozen credit markets. Further, 2-year bonds yields, a benchmark for the short-term borrowing strength and solvency of a nation, rose to the highest level since June, rising as high as 4.007 percent.

Italian bonds have been subject to headline risk, not just Italian economic data but data from across Europe. In the next few days, there is a slew of data due out that could determine the next move in bond yields. On Wednesday, U.S. investors will wake up to lots of data that had been released in Europe. At 4:00 am, the German IFO Business Climate Index is due out and it is a bell-weather data point that is used as a leading indicator of growth. Economists are expecting a reading of 104.7, lower than the previous 105.3 reading.

More data is due out at 4:00 am related to Italy, as the Italian Consumer Confidence Survey is due out. Economists are expecting a reading of 85.0, slightly lower than the previous 85.3, but effectively a flat month-over-month reading. At 5:30 am, Germany is set to auction 30-year bonds. A weak auction in AAA-rated Germany could cause investors to sell riskier peripheral bonds, including those of Italy. The yield at the previous auction was 2.41 percent.

There is more data due out throughout the week, including Italian retail sales and German consumer confidence on Wednesday. On Friday, data on German CPI, Spanish unemployment, and Italian business confidence headline the calendar. All in all, there is lots of headline risk in the European sovereign debt markets and investors should position accordingly.

One security to watch, aside from the sovereign bonds, would be the euro. The EUR/USD will most likely move on sentiment emanating out of Europe and could be a way for investors who do not trade European bonds to implement a thesis on these data. Weak data, especially out of Germany, would be negative for the euro and send the EUR/USD lower most likely. Forex analysts have been noting that the midpoint of the all-time range for euro is near 1.2087 and should the pair break decisively below this level, it could target 1.20 quickly.