Italy Proves How Markets Have Abandoned Logic

Let this sink in for a minute: Yields on two-year Italian government bonds briefly fell below 0% on Tuesday. That's right - for a moment, investors decided it was just fine to pay Italy for the privilege of lending it money, even though barely a month ago the country was on the verge of a fiscal crisis so bad some wondered whether it would be need to leave the euro zone. It matters little that yields ended the day on the right side of zero at 0.02%, but even that shows how the “greater fool” theory in markets has gone too far.

What makes the developments in Italy’s bond market even more shocking is that at Baa3, its debt is rated just one step away from junk status by Moody’s Investors Service. Italy is far from the only place where logic has been suspended. The global universe of negative-yielding debt topped $13 trillion in recent weeks, doubling since December. The global stock market surged 14.5% in the first half of the year, its best performance since 1997, despite forecasts that the worldwide economy is in the worst shape since the financial crisis. This is all a reflection of the idea that paying a premium for risk is for fools in a world where central banks have made clear that they will do whatever it takes to support the global financial system at any sign of trouble; they already injected the equivalent of many trillions of dollars into the worldwide economy since the Great Recession. What got investors in Italian bonds buying on Tuesday was news that the government agreed to cut its 2019 budget deficit target to 2% from 2.4% in a bid to avoid European Union sanctions for failing to rein in spending. It remains to be seen whether that will be enough to appease the EU Commission, which will meet later this week to decide whether to launch a disciplinary action, according to Bloomberg News’s Lorenzo Totaro.