The Sentix Euro Break Up Index is on the rise again, up to 24.08 in the latest monthly reading (as of 11/30/2016).
Unsurprisingly, the main driver of the overall increase is Italy. In advance of the constitutional referendum to be held this Sunday, the probability that the country will exit the eurozone (light blue line/ bar in the charts below) jumped more than 9 points in November (following an almost 4 point increase in October).
Turning to the bond markets for signs of confirmation, we do not see an overwhelming endorsement of the increased probability for the exit of Europe’s fourth largest economy (by GDP). The spread (red line) between Italian and German yields–while indeed elevated–appears to be contained for now, having fallen from a high of 186 bps on Monday (primarily due to a very slight uptick in investor appetite for Italian debt).
Looking at the year-over-year change in the spread, we find that it peaked on November 28th (just prior to the release of the Sentix survey results) and has declined somewhat since then.
