Are European bond investors looking for love in all the wrong places?
The premium bankers demand to hold various types of euro zone debt over that of Germany has recently come down. In normal circumstances, this might suggest markets are no longer discriminating between the risks associated with different member countries’ bonds. But analysts say the recent convergence is based on a precarious belief of ECB action rather than any real improvement in economic fundamentals.
Spain and Italy still offer a comfortable premium over Germany. But a narrowing in yield spreads that is being driven by a fall in the funding costs of Spain and Italy, rather than by a rise in German yields, gives reason for pause.
According to Lyn Graham-Taylor, fixed income strategist at Rabobank:
The fact there is almost no movement from Germany and a huge movement in peripherals is indicative to us of this convergence for the wrong reason.
If we were getting debt mutualisation and there was a convergence of yields for the right reasons then you would expect there to be a more meeting in the middle than there is.
Spanish and Italian yields have fallen more than 2 percentage points since ECB President Mario Draghi’s promise to protect the euro last year, while German borrowing costs have barely budged over the same period.