Stocks are being dragged very deep into the muck today as investors in Italian bonds are pushing yields up above 7%. The Dow has fallen as much 430 points today, and was more recently down about 370 points or 3%. Morgan Stanley (MS) is off 8%, leading the financial sector lower.
And if Greece’s meltdown teaches us anything, there’s a good case to be made that the worst isn’t over yet.
Are Italian bonds actually more risky today than they were yesterday, when the shaky regime of Silvio Berlusconi was still in power? That’s certainly debatable, but it may not even matter. The momentum building against Italy right now is reminiscent of the anxious mood that pushed Greek yields above 11% after investors first started voicing concerns about 5% yields there.
In short, the market has been progressively asking scarier and scarier questions, and then coming up with the expected scary answers. Without aggressive leadership in place in Greece and Italy, that self-perpetuating question and answer session can only continue. In a cogent piece at Smart Money, Jack Hough explains why investors no longer trust bond insurance or credit-default swaps to protect them from default risk. It’s a good primer for stock investors trying to understand why their equities are plunging because of a debt problem.
And for ongoing coverage of the crisis, the new must-read at Barrons.com is my colleague Michael Aneiro’s Income Investing blog.
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