Italian politicians are increasingly issuing warnings that an attack on the Italian bond market might be in the making. How would such an attack work? In general, the answer is very simple: investors offer their securities for sale, which leads to falling prices and, conversely, rising yields. Rising yields in turn increase the refinancing costs of the Italian state, which is one of the most indebted countries in the world.
An analysis of which investors have actually reduced their holdings of Italian bonds in recent years offers some interesting insights who might be behind the "attacks". In our "Chart of the Week", we show how various investor groups' holdings of Italian government bonds have changed since the euro's introduction. Overall, Italy's bond-financed public debt increased from EUR 1,180 billion to EUR 1,995 billion. Of this increase, the central banks acquired EUR 314 billion, while domestic financial institutions added EUR 417 billion. Foreign investors, on balance, increased their holdings by EUR 373 billion. Other Italian investors, such as private households and companies, however, reduced their holdings by EUR 289 billion.
So it looks as if Italian savers, not foreign investors, seem not to trust their own state. They probably have good reasons to, and not just because of politics. Risk diversification comes to mind.
Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 9/6/18