Macroscope | US dollar revival and Italy’s political chaos finally rouse investors to global market risks

The trading of European government bonds is no longer for the faint-hearted. Last year, the yield on Italy’s two-year debt, which remained in negative territory for most of the year, traded in a super-tight range of some 20 basis points.

On Tuesday, the yield shot up a staggering 180 basis points, to 2.8 per cent, at the time a tad higher than its 10-year US equivalent and the sharpest intraday move since records began in 1992, according to data from Reuters. The sell-off reflected mounting concerns among international investors about Italy’s commitment to Europe’s single currency as the country' s two main anti-establishment parties struggle to form the first populist government in a leading European economy.

Italy’s political crisis, which is rippling through financial markets, is the latest sign that, following a two-year period of subdued volatility and stellar returns, investors are being jolted out of their complacency and forced to reassess risks and vulnerabilities in the global economy.

In the space of just four months, markets have had to contend with a surge in volatility in US stock markets, a sudden end to the period of “synchronised” global growth, a sharp sell-off in emerging markets stemming from an unexpected rise in the dollar and Treasury yields and, to top it all off, renewed concerns about the integrity of the euro zone.