Nick’s Note: Regular readers are familiar with Income Extermination. That’s when rising interest rates crush bond prices. It’s a theme we’ve been following for months in the Daily.
And an even worse version of Income Extermination may be playing out overseas, where rates are rising even faster than in the United States. Our friend and colleague, Casey Daily Dispatch editor Justin Spittler, has the scoop below…
By Justin Spittler, editor, Casey Daily Dispatch
Italian bonds are getting rocked.
Last Tuesday, the yield on Italy’s two-year government bond jumped from 0.8% to 2.7%. That’s more than triple where it ended last Monday.
It was the biggest one-day jump for Italian two-year bonds since 1989.
That might sound like a good thing. After all, Italian bonds now pay a lot more than they did a few days ago.
But you must understand something. A bond’s yield rises when its price falls. In other words, Italy’s two-year bond just had its worst day in nearly three decades.
I’ll tell you why this is such a big deal in a second. But first, let’s look at why this is happening.
- Italy is on the verge of a major political crisis…
At least, that’s what Crisis Investing editor Nick Giambruno thinks. Here’s what Nick—who’s been monitoring the situation in Italy for years—told me in a private email:
One way or another, Italy’s populist parties will come to power, and probably soon. They are already some of the largest political parties and are growing in strength each day.
Once in power, they will ask for concessions from the European Union (EU) that will be impossible to give, such as forgiving hundreds of billions of dollars’ worth of Italian debt and allowing the Italian government to run enormous budget deficits.
If that happens, the entire European Union could fall apart. Nick went on to explain:
Italy is not a marginal economy. It’s the third-largest economy in the EU.
So, the EU has a choice to make. It will either accept Italy’s demands, and create a moral hazard that will eventually unravel the euro. Or it’ll reject the demands, at which point Italy will have no choice but to leave the euro. And if Italy leaves, it’s unlikely the euro could survive.
- The euro is the glue that holds the EU together…
Without it, economic ties weaken, and the whole EU project unravels.
We’re already starting to see the market reflect some of this risk. Just look at how the euro has fared against U.S. dollar recently.
The euro is down about 6% against the U.S. dollar since the beginning of February. It’s now trading at a 10-month low.
If this situation intensifies, the euro will keep falling. So, be sure to steer clear of the euro.
I also recommend buying physical gold. If Nick’s right, many investors will likely shelter in gold because of its long history as a safe-haven asset. You can learn about the best ways to buy and store physical gold in our free report, “The Gold Investor’s Guide.”
Editor, Casey Daily Dispatch
P.S. If you want to profit off Italy’s crisis, Nick Giambruno has found an easy way to bet against the euro and Italian bonds. He has all the details in his Crisis Investing letter. You can access these trades, and all of Nick’s recommendations, by signing up for Crisis Investing.
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