The P.T. Barnum Bond Market - Rodney Johnson/HSDent (11/29/11)

The Financial Times ran a story about Italians being urged to personally buy Italian government bonds out of a sense of patriotism. Hmmm. This has been tried before, as the Japanese government ran an ad years ago portraying young women as preferring men who buy Japanese government bonds. I’m not sure either campaign was successful. The Italian government certainly convinced individuals to buy more government bonds over the last two days, but they did it the old fashioned way – by enticing them with money.

Light years ago, in a galaxy far, far away (or maybe just last week), if a member of the euro zone had to pay more than 7% on its debt then it was considered the sign of imminent financial ruin. Today, things are different. The Italians issued several different maturities of bonds, paying over 7% on all of them, with the 3-year bond yielding a whopping 8%! To make the deal even more attractive, bond brokers waived their commissions for individuals who wanted to take advantage of the attractively priced bonds.
 
The question is, “Will they investor be repaid at 100%?” On this score, the Greeks are a fine example. As their borrowing costs soared the Greeks went looking for a solution, and found one in the 50% haircut they are currently peddling to private bondholders. This assumes that the Greeks remain in the euro. If the country exits the common currency then the repayment will be far, far less. The Italians seem to be traveling the same path, albeit a bit slower.
 
Maybe this is why other governments, sovereign wealth funds, pensions, trusts, insurance companies, mutual funds, and any number of other institutions did not want to buy those same Italian bonds in a quantity and at an interest rate that would satisfy the government, leaving the general public as the last hope to take on the bonds. Suddenly these bonds don’t look like such a great deal at 8%, or 10%, or as in the case of Greece, 300%. With dim prospects for getting all of your money back, it’s a good thing there’s a sucker born every minute.