Bonds: Signs of contagion in Italian debt?

These were the movements in some of the mos widely-followed 10-year sovereign bond yields on Monday:

US: 2.87% (+0bp)

UK: 1.25% (+1bp)

Germany: 0.31% (-1bp)

France: 0.68% +1bp)

Spain: 1.45% (+5bp)

Italy: 3.10% (+11bp)

Portugal: 1.85% (+7bp)

Greece: 4.29% (+7bp)

Japan: 0.10% (+0bp)

Longer-term sovereign bonds were mostly lower on Monday, as traders continued to take stock of the situation in Turkey.

Some analysts - but by no means all - appeared to be confident that events in Turkey would not lead to the "contagion" of financial assets from other geographies.

On that note, Holger Schmieding at German broker Berenberg said: "Our base case remains unchanged: economic fundamentals will prevail in the end as the key risks will not fully materialise. That will allow markets to return to risk-on mode before the end of the year after a rocky summer now. Unfortunately, each crisis such as the current turmoil in Turkey adds to the risk that the wobbly patch for markets and the Eurozone economy may last a little longer."

Yet without an immediate hike in interest rates, then further weakness in the country's currency, the lira, at least, appeared to be on the cards.

On Sunday evening, Turkey's monetary authority finally reacted to the slide in the lira, albeit arguably not strongly enough, announcing measures designed to avoid problems in the banking system by ensuring that short-term liquidity was available - but no rate hikes were forthcoming.

Against that backdrop, euro area periphery debt came under some selling presure on Monday, with Italian sovreign debt faring worst, as market participants tried to determine the true ultimate cause (s) of the selling in periphery debt.

Was it slight contagion? Did it have more to do with expectations for interest rates in the US? or were investors simply paring back positions in other assets deemed especially risky in an attempt to manage their overall level of risk?

For his part, in an interview with Corriere della Sera, Italian deputy Prime Minister, Luigi di Maio, tried to preempt any political backlash, saying: "I don't see a real risk that this government will be attacked, it’s more a wish of the opposition."

Also on Monday, a person familiar with the situation told Bloomberg that the Italian government had held contacts with the European Central Bank regarding the risk of a speculative attack on Italian debt.

For their part, analysts at Dutch broker Rabobank were telling clients that "mixed messages" from various officials in Rome about the Budget had led to some anxiety in periphery debt markets "and made Italian debt an easy target in the current market rout".

"Italian budget talks could drag on into early autumn and could therefore remain a constraining influence on EUR/USD. We have been bearish on EUR/USD since March, however, the pace of the recent drop has taken us by surprise," the Dutch broker said.

" [...] The sharp fall in the value of the EUR on Friday morning and the continued pressure on the unit into the weekend was illustrative of events in Turkey developing from idiosyncratic to contagious."