Bond Yields in Italy Skyrocket In Response to Margin Increase

With yields on Italian debt already rising beyond the comfort zone, LCH.Clearnet added insult to injury by increasing the margin requirement needed to trade bond spreads with the Eurozone’s third largest country.

LCH.Clearnet raised the initial margin rate applied to Italian debt by between 3.5 and 5 percentage points across all maturities of BTP and inflation-linked BTP bonds. This means that traders must now put up additional cash in order to make spread trades involving Italian bonds.

According to the company website, LCH.Clearnet is the leading independent clearing house group, serving major international exchanges and platforms, as well as a range of OTC markets. It clears a broad range of asset classes including: securities, exchange traded derivatives, commodities, energy, freight, interest rate swaps, credit default swaps and euro and sterling denominated bonds and repos; and works closely with market participants and exchanges to identify and develop clearing services for new asset classes.

CNBC reports that such clearing houses, collect cash in the form of margin on individual trades, which they hold in the event of a default.

It is important to note that when LCH.Clearnet Ltd took similar action on Portuguese and Irish debt after bond yields soared, it increased selling pressure on the bonds to the increased costs of trading the bonds. Both countries were later forced to seek bailout loans from the EU/ECB/IMF.

In response to the increased margin requirement at LCH.Clearnet, yields have spiked higher in Italy early Wednesday as sellers swamped the market with 2-, 5-, and 10-year bonds having all traded above 7% this morning. According to reports, the 2-year recently traded at 7.52%, the 5-year yield was at 7.77%, and the effective yield on the 10-year soared to 7.445%.

There have been widespread reports that the surge in yields has come despite ECB buying.

Global stock markets have fallen sharply on the news. France is down -2.45%, Germany is off -2.6%, and Italian stocks are plunging -4.08%.

 

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