Macroscope | Italy’s negative bond yields speaks volumes about Europe’s economy

Last week, Italy, a country with the second-highest public debt burden in Europe after Greece, sold 2-year bonds at a negative yield for the first time.

Investors were willing to pay for the privilege of lending to one of the most fiscally profligate countries in the world.

While a number of European countries have auctioned bonds with even longer maturities at negative yields this year - Germany sold five-year debt at a negative yield in February while Switzerland sold 10-year paper at a negative yield in April, the first time a government made investors pay to lend to it for such a long period - Italy is the unlikeliest member of the negative yield club.

This, after all, was the country that was once the focal point of investor anxiety about the eurozone. In November 2011, Italy’s 2-year yield stood at a crippling 7 per cent amid fears that the country may need a full-blown bail-out given its high level of indebtedness and persistent lack of growth. Indeed 2-year yields were still trading near 5 per cent in May 2012.

Since then, while Italy’s dysfunctional political scene has stabilised and the economy has at least stopped contracting, growth is extremely weak and Italy’s public debt burden continues to rise.

So how is it possible that investors are paying the Italian government to lend to it?