New numbers from the European Central Bank (ECB) reveal the extent to which foreign investors have been liquidating their holdings of Italian debt. According to the ECB, Italian debt holdings declined by 38 billion euros in June, following a similar 34 billion euro drop in May. Both figures broke net debt sales records for their respective months.

So far, the sell-off hasn’t been reflected in Italian bond yields. The 10-year yield continues to fluctuate within the 2.5-3.5% band where it settled in the wake of general elections earlier this year. The lack of real movement in bond yields despite the sell-off is due to Italian banks stepping in to soak up excess supply. According to the Financial Times, Italian banks have increased their net holdings of government debt by more than 40 billion euros over the second quarter of 2018. Yields could be seeing further upward pressure later in the year as the ECB winds down its QE program, ushering in interest rate normalization after years of easy liquidity.

The health of the Italian economy is a key barometer for the euro zone. It wasn’t that long ago that the PIGS acronym – Portugal, Italy, Greece, and Spain – was inhabiting the imaginations of euro doomsayers during the Great Recession. The story of Greece is well known; the country recently emerged from its austerity program, but only after having accepted spending controls until 2059. The other PIGS countries shared Greece’s structural risks to varying extents: high fiscal deficits, low growth, and large piles of debt. Since accepting an IMF-EU bailout of 78 billion euros in 2011, Portugal has turned its finances around, narrowing its deficit to around 1% and recording 2.3% growth year-over-year in the second quarter. Spain has also narrowed its deficit to 2.7%.