The recent political crisis in Italy has given rise to expectations that President Matarella has in effect launched a referendum on the EU/euro. This makes for a wonderful application to study interest parity. The Wall Street Journal’s Daily Shot Blog as (as usual) all the relevant graphics: Italian 2 year bond yields experienced the greatest one-day increase in years (NB: yields were negative just a few days ago!): Source: Bloomberg

And, to complete the interest parity case study, here is the 10 year Bond Spread to Germany, which has the identical currency!

And then there is contagion with immediate spillovers into Spain and Portugal, as their CDS Spreads* and Bond Spreads widen:

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[*CDS or a Credit Default Swap is referred to as its “spread,” and is denominated in basis points (bp), or one-hundredths of a percentage point. For example, right now a Citigroup CDS has a spread of 255.5 bp, or 2.555%. That means that, to insure $100 of Citigroup debt, you have to pay $2.555 per year]